Industry Voices — Heynen: Mixed messages in 1Q20 broadband equipment

After cable operators dramatically reduced their spending from 2018 to 2019, there was some hope that 2020 would start stronger, says Heynen. (Getty Images)

The first quarter of the year saw service provider investments in broadband access equipment drop to $2.5 billion worldwide, down 15% both quarter-over-quarter and year-over-year. Notoriously slow to begin with after operators flush their budgets in the fourth quarter, the quarter was impacted by the COVID-19 pandemic, particularly in the Asia-Pacific region. The temporary closing of manufacturing facilities in China and Taiwan, combined with limitations on the import of necessary components and the export of finished equipment resulted in reduced supplier revenue.

We expect that the second quarter will see similar levels of purchasing activity as the Asia-Pacific region returns to full-scale production and purchasing, but Europe and North America feel the brunt of the pandemic.

Service providers are certainly in an interesting position when it comes to their capital investments in broadband equipment right now. Clearly, broadband has shown itself to be a critical and essential service for a large percentage of the global workforce now conducting their business from home. Combine that with children now being educated and entertained at home and the demand for more bandwidth and a stable connection will remain important, regardless of how quickly things return to normal.

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But service providers must also factor in the potential for a sustained economic slowdown throughout the rest of this year and potentially into next. As a result, we are expecting operators to spend judiciously on their broadband networks, adding capacity to address areas where bandwidth has become constrained and ensuring that there is enough CPE to handle the influx of both new broadband subscriptions as well as upgrades to existing packages.

CCAP, R-PHY spending down, but capacity upgrades will be needed

One of the harder-hit areas of the broadband equipment market in the first quarter was cable access concentrators, which includes CCAP, virtual CCAP, R-PHY, and R-MACPHY equipment. Total revenue for this segment was down 22% year-over-year, reaching $211 million. Again, the first quarter is typically one of the slowest of the year for spending on these platforms, as cable operators focus on deploying the capacity they purchased to close out the previous year.

But the decline was particularly troubling because it represented the lowest quarterly revenue total since 2007, before the DOCSIS 3.0 ramp. Indeed, the low point can be mapped to the scalable infrastructure capex reported by two of the world’s largest cable operators—Comcast and Charter Communications. Combined, these two heavy hitters spent just $572 million in this segment, which includes products such as routers and switches, in addition to CCAP and R-PHY gear.

Dell'Oro chart

But after dramatically reducing their spending from 2018 to 2019, there was some hope that 2020 would start stronger as MSOs focused on expanding DOCSIS 3.1 capacity after having little incentive to in 2019. But, global crises have a way of changing even the best-laid plans.

That being said, we still expect cable operators to ramp up their investments as the year progresses as many have already seen in one quarter the type of traffic growth they expect for an entire year. A very telling precursor of upcoming capacity investments was the growth in total cable CPE unit shipments in the quarter, especially among DOCSIS 3.1 units, which reached 5.8 million units worldwide, up from 4 million units just one year ago. With major operators such as Comcast, Cox, Charter, Vodafone, Liberty Global, and others all expanding their end-to-end DOCSIS 3.1 availability, but also taking increasing orders to upgrade to premium broadband tiers, we don’t expect the DOCSIS 3.1 CPE market to slow down at all this year.

Reduced spending on ONTs hurts overall PON segment

Meanwhile, PON equipment spending in the first quarter was also down largely due to a 15% year-over-year reduction in new ONT purchases. Again, some context is useful here, as the first quarter typically sees a slowdown in new ONT units and OLT ports. However, OLT ports, on a year-over-year basis, were flat, which shows that there is sustained interest in the deployment of FTTH infrastructure, particularly in North America and Europe. Both regions should show increased FTTH network deployments later this year and well into next.

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In the U.S., the Rural Digital Opportunity Fund (RDOF) will result in a large number of new and expanded FTTH networks among Tier 3 operators, while in Europe, we expect that the COVID-19 pandemic will result in operators being willing to switch a larger portion of their DSL subscriber base to fiber.

While 2.5G GPON will remain the workhorse for the next few years, 10G variants are quickly ramping, with 10G EPON and XG-PON1 currently leading the way in China, and XGS-PON becoming the leading variant outside of China, Japan, and Korea.

In the case of both greenfield XGS-PON deployments and upgrades to existing 2.5G GPON networks, operators are increasingly looking at virtualized OLTs or OLTs with open interfaces to facilitate interoperability with existing network management systems. For operators, network automation is becoming a requirement of their next-generation access networks. With broadband services and applications becoming more diverse and running the gamut from very asymmetric applications to those that perform best with symmetric or near-symmetric speeds, automating the network to support different application tiers is becoming essential. 

Additionally, as the COVID-19 pandemic has shown, operators need automation tools to provide their broadband access networks in cases where workers might not be physically able to enter network operations centers. 

Thus, the transition to next-generation fiber networks will be predicated on two simultaneous evolutions: the evolution to 10G and the evolution to automated and, ultimately, virtualized infrastructure.

Jeff Heynen is senior research director for broadband access and home networking at Dell'Oro Group. He joined Dell’Oro Group in 2018, and is responsible for the broadband access and home networking market research program. While at the firm, Heynen has expanded the broadband access and home networking coverage areas. Heynen’s research and analysis has been widely cited in leading trade and business publications. Heynen is a frequent speaker at industry conferences and events, including Broadband World Forum, CES, FoE Japan, FTTH Conference, and the SCTE Cable-Tec Expo. He can be reached at [email protected]; follow him @JeffHeynen.

Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by FierceTelecom staff. They do not represent the opinions of FierceTelecom.