Broadband's 5-Year Outlook

Global PON Equipment Revenue to Grow to $7.3 Billion by 2023

September 5, 2019

 According to a newly published report by Dell’Oro Group global PON equipment market revenue is forecast to reach $7.3 B by 2023, driven by spending on new 10 Gbps EPON and XGS-PON deployments, and on maximizing existing 2.5 Gbps GPON networks. The Broadband Bunch had the opportunity to interview Jeff Heynen about his findings.

“Fiber deployments continue to expand around the world, thanks to increased competition and an improved funding environment for both public and private networks,” noted Jeff Heynen, Research Director at Dell’Oro Group.

Pete Pizzutillo:  Looking back at your career it looks like you've been researching the broadband / telecommunication industry for some time. 

Jeff Heynen:  I guess I’m pushing about 15 years, specifically focused on broadband access and home networking pretty much all that time, as well as video.  I started off at Salix Technologies doing voiceover IP, Gateway and Soft Switch product management, and then to sentitO Networks. After a couple of startups, I said, "Well let's take a look at the analyst side."

I've been working with DSL component suppliers at that point in order to put together line cards for our VoIP gateway. And it just seemed like an interesting area of the market, especially with, at that point, fiber to the home really just beginning in Japan and Korea and ultimately here in the US with Verizon. So I made the jump to Infonetics research and have really never looked back. There's always something new, as you know. And there's always a new challenge and a new way to look at the market and a new perspective.

About Dell’Oro Group’s Quarterly Broadband Report

Jeff Heynen:  Dell'Oro Group is a small independently owned market analysis firm focused on the telecommunications networks, enterprise networks and data centers. We strive and pride ourselves on being accurate and objective, the go to source for market data and forecasting for each of those product areas and market verticals.  I cover broadband access, which is all fiber to the home equipment, all DSL equipment, as well as all the cable broadband equipment, everything from the network into the home or a small office or enterprise to deliver broadband services.

Pete Pizzutillo:  I found the Broadband Access Quarterly Report that you published earlier this year. And you mentioned that you have another report coming out. Can you tell us a little bit about both of those?

Jeff Heynen: Every quarter we produce reports that track the market size for each quarter, vendor share results for most of our product categories, and on a global basis also broken out by region. And then twice a year we also update our five year forecast for each of those product segments as well. And as you mentioned, I think we first connected after the Q19 results came out, and then obviously just two days ago I just published my five-year forecast.

I think maybe we should just talk about the five-year forecast and the high-level thought processes that go into creating that forecast. What we're seeing right now is, particularly in places like Europe and also very obviously at AT&T, is a very concerted effort to switch from traditional DSL technology, these over to fiber to the home.  And I as I look out my door right now, they're laying conduit to put in fiber to the home today. It's going be a while, but it's been an interesting process to watch my yard get dug up. But you know, at the end of the day what you realize is that this is essentially a real estate business and counting ports and counting software licenses and revenue and things like that are part of it certainly, but ... and this goes to the trends that we're seeing in the long term is, Telcos, cable operators, ISPs, municipalities, they're all in this real estate business and they're all trying to maximize how they use that real estate. And that's why there's this huge effort now in ... towards virtualization, towards maximizing the rack space and head end space, central office space that they have, and distributing those networks out closer to subscribers to make their networks more efficient and really prepare themselves for the next 25 years.

Pete Pizzutillo:  You mentioned AT&T, why did you specifically call them out?

Jeff Heynen:     Well, I think it's been interesting because for a number of years they were with Uverse. I mean they were very ... very publicly committed to VDSL as an alternative to when Verizon was doing full fiber to the home via FiOS. And here they are changing ... they're changing their tune and upgrading all of that plant ultimately to GPON and XGS-PON and in the MDU locations, fiber to the building basement or the floor using G.fast. So it's been an interesting architectural shift, but with cable operators pretty easily and cost-effectively rolling out DOCSIS 3.1 which can do some gigabit downstream service, of course they have the challenges on the upstream side. But for AT&T and Verizon, I mean, as I look out my window here, the operator that's putting the fiber into the ground, but I guarantee you this is the last time that they want to be digging up people's yards, and doing directional drilling. They want that to be the end and they want to maximize that fiber investment and throw whatever traffic they can, whether it's a residential, or Mesh Wifi or 5G back haul over those networks intelligently.

Digital Service Providers and Infrastructure

Jeff Heynen:  This all raises something that I've held for quite a long time, is that ultimately, telcos and service providers, cable operators, there is going to be a group of them that completely outsource their networks. We've talked about this off and on over the years, especially on the wireless side, I think Sprint had tried outsourcing to Erickson at one point network management. But with software and virtualization, network slicing, and some of all these capabilities that are being introduced from layer three on up, it makes it interesting to think about operators structurally separating their networks.  And that's real and it's happening in Europe. You have municipal networks where they're open access.

But it's a real possibility where you have companies like Crown Castle and American Tower who ... they're building, they have tower infrastructure, and fiber, and data center infrastructure. What's not to say that they don't go and say, "Well you know what, you have all this fiber as well. We'll just manage that. And you guys manage the content delivery."

And of course, this has been an off and on discussion for years for telcos, is how do they get out of the infrastructure business and being dumb pipes. Well, you know, there are some that for the business model maybe it makes sense to maintain that portion of the network and for some maybe it doesn't.

Pete Pizzutillo:  You can look at other industries over the last 20 years that have done the same, right? Think about how Amazon got to be the behemoth by manage the services for all retail shops. Same with insurance when you look at United Health Group and how they rolled out their infrastructure for insurance.  And they manage all that and let insurance companies just serve customers instead of becoming IT guys. Like a natural extension of things that we've seen in other communities.

Jeff Heynen: And then financially, if you look at Comcast and AT&T specifically as they've acquired more content companies, it becomes very difficult to continue to spend on programming.  And content and at the same time maintain a CapEx that's going to make Wall Street happy.

Broadband Market in Five Years

Jeff Heynen:     I see total broadband access spending being flat over the next five years. And that's an aggregate, but at the same time, that doesn't mean that they're ... that the capacity increases aren't happening. They certainly are across the board for cable operators, telcos, municipalities. I mean, broadband is the service to provide. The margins on it are phenomenal and it is a service that everybody practically needs. But with that come the challenges of it being considered potentially a commodity service.  So, as the efficiencies and costs associated with the product go down, the operators can continue to put in more of that capacity while spending about the same.

Pete Pizzutillo:  Right. Yeah, I don't think that's a bad indicator. Right? I mean, there's a lot of money being spent there already. I think there's a lot of legacy stuff that needs to get modernized. There's a lot of new technologies that are coming out. So the spending levels kind of balance each other out potentially, if we can squeeze out the efficiencies and get rid of all the costs inefficiencies over time.

Jeff Heynen:     Exactly. There are legacy technologies, but again, it takes so long to make that transition away from those legacy technologies, especially if they're generating revenue even if customers might not be entirely happy with it.  But if you're in a situation where you're the only game in town, then you don't have incentive really to update. And that's where things are changing is that there is competition in more markets and that is forcing these operators to make those ... continue to make those investments to keep pace.

How long can DOCSIS survive?

Pete Pizzutillo:  That's a good point, instead of modernizing to make customers happy, it might be nice to protect your customer base. One area that's interesting is DOCSIS, but how long can cable operators squeeze money out of copper?

Jeff Heynen:  Every time I think, "Oh boy, this is going to be the last round for DOCSIS," they are able to come up with new architecture, new chips, and a new way to manage the available spectrum. And as such that it remains competitive and bandwidth continues to grow.  Now of course we're at this interesting inflection point in the cable market where doing that via a centralized CCAP platform in the head end just is not going to work anymore. And so now you're at that point where you do need to distribute some of those capabilities and that functionality closer to subscribers so that you can take some of that analog spectrum that's still out there, and analog lasers, move them to digital, really improve the spectral efficiency of those networks, and be able to get to ultimately symmetric speeds over that last HFC loop.

What about Fixed Wireless?

Jeff Heynen:  Right now, the impact has been sort of minimal. There are certainly markets where it is very important. Rural markets of course, that is really the only option. And places like Australia, Indonesia, Malaysia, and Japan is another place where a fixed wireless broadband has taken off. A lot of it has to do with just the fact that there is an existing infrastructure in place, or there isn't an incentive to upgrade from copper to fiber, or HFC to full fiber because of the distances between homes.  So, the long answer to your question is it has a minimal impact right now, but in the future, it certainly is going to have an impact. And one thing that I think is interesting and we were going to talk about challenges for broadband. I don't think its competition from fixed wireless that is going to really put pressure on the fixed broadband business. It's really going to be this generation of kids that are growing up with mobile devices that may never have a fixed broadband connection because everything is in their hands. They have never had a TV subscription, and so they may never have a fixed broadband subscription. And I think in 10 years, we may see a shift over to cord cutting or cord nevers, right. The same on the video side that we will on the fixed broadband side.

Pete Pizzutillo:  Can you give us a date when there'll be no more TVs in the house?

Jeff Heynen:  I think TVs will be there. I think they'll always be there, but they're ... I guess the average has always been at least in the US about 2.3 television sets per home.  But that number has stayed pretty stagnant and it's not growing. And that's because everybody goes into their own rooms and watches on their devices.

One last point, I'll make about fixed wireless is that it will ... fixed wireless won't take off until operators remove the data caps and they treat it as equivalent to their fixed broadband connection. Right now, of course, there aren't enough subscribers and modeling to know just how much usage they have on those networks so far. So, it's a bit of a risk that you're going to have these power users suddenly slam your mobile network.

Impact of 5G

Jeff Heynen:  I am looking at 5G as a longer-term potential siphon for fixed broadband. In the short term, we're seeing some CapEx shift in Europe, for example, where they just had 5G spectrum options. You've had public comments Deutsche Telecom, and I would expect others, maybe they won't make public comments, but again, trying to balance the budget and make sure you're not overspending. I mean, they're all spending a ton of money right now to buy 5G spectrum and they're going to pull that money away from their fixed broadband investments. So that's what I'm expecting in this year and also in a portion of next year as well. And then it will ... it's like a sine curve. You have to then start reinvesting back in that the portion of the network you've neglected. And so that's what I think is happening currently.

Pete Pizzutillo:  Do you an impact on the consumer with that shift? Is it just really delaying some things that people are waiting for? Is it a drop of service? Any impact to me today based on that shift?

Jeff Heynen:  Well, I think for some operators it means expansion into cities that they had on their plans are not going to happen. And upgrades, specifically, let's take Deutsche Telecom, specifically an upgrade from existing VDSL to Super VDSL or profile 35B or even G.Fast, those aren't going to happen until they can pay the bills for the spectrum that they just bought.  So it's going to have an impact on the consumer as to the availability of higher bandwidth services.

Pete Pizzutillo:  Do you see 5G helping or broadening the digital divide?

Jeff Heynen:  I think there is some regulatory aspect here that have to be taken into consideration. And I think there was this idea here in the US floated for nationalizing the 5G network. I don't know where that stands or how realistic that is. I don't think it's very realistic, but ... again there has to be some effort on the part of regulators to ensure that the focus isn't just on cherry picking the high revenue. But again, because that's operator's natural inclination is to go where the numbers are. And to go where the money is. So again, you have to step in and say, "Okay, if you're going to do it here, you should also make sure to provide the services to everyone." So we have not, at least in the US, been super successful at that, even on the fixed broadband side, to be honest. And I hate to say it, but I don't think much is going to change.

Pete Pizzutillo:  So with open access networks and municipal funding, do you see the divide closing?

Jeff Heynen:     I hope so. I don't know if the funding opportunities are the equivalent to what we saw with CAF and CAF2 and Broadband Stimulus at this point. It will be interesting over the next few years as these 5G networks do get rolled out in earnest exactly what the coverage is, and especially on the fixed wireless side. In theory you can address more markets without having to upgrade fixed infrastructure. But again, it seems thus far that the fixed wireless deployments have been cherry-picked. Based on relationships with town governments and topography, for example, is a big determinant as well.

The Future of Open Access

Pete Pizzutillo:  There are varying definitions of open access networks out there. The Europeans have a pretty consistent view, but I think in North America there are a few definitions. How do you define open access networks?

Jeff Heynen:  I think the European model has been very consistent in that regard. We're seeing funding in the European market open in the UK and Poland, and other markets where there have been fiber networks that were started and abandoned, and now private funding is coming in to complete those networks and offer that type of structural separation. Here in North America, we've seen projects like that before, like Utopia, especially on the wireless side.  There were many RFPs floating around to do citywide mesh networks. I certainly think the technology options, as I mentioned earlier, have now increased to the point where it does become more realistic for the individual towns to go ahead and either put more fiber into the ground or deploy Mesh Wifi or use some type of fixed wireless service as a way to increase broadband penetration in their communities.  I am hopeful from that perspective. However, there have been regulatory limitations from the state legislature that have limited municipal networks. So again, there's not only the funding aspect of it, there's that regulatory aspect where private service providers want to protect their infrastructure investments.  And they don't want to give up subscribers just because a town wants to go ahead and offer a service to their residents.

What’s the impact to the consumer?

Pete Pizzutillo:  We’ve talked about a lot of challenges: mobile youth and regulatory issues. Is there anything else you wanted to highlight?

Jeff Heynen:  I think for broadband providers that challenge is coming from increased competition from fixed wireless, from other ISPs, and again also potentially from this generational shift to a mobile only customer base. For consumers, I think the challenge is that there is going to be so many options. Just look at the video market now. We obviously see continued cord cutting shift away from traditional pay TV packages.  But then I think there's going be, quite honestly, this inertia at some point where people, they realize I'm packaging Netflix and Hulu and I get all these offers to ... people telling me what shows to watch, so I'm going to add. And what's to happen is they're going to look at their combined bill for all these services and say, "My goodness, I'm paying more now than for what I was getting before."

I think consumers are going to be savvier about all the options, but there's going to be a period of time where it's just choice overload. The onus is really on the consumer to understand their own need. Maybe I don't ... at home I don't need symmetric one gig service or five gig service, even. Maybe that just isn't for me. And operators are ... the technologies are coming to be able ... to be able to shift bandwidth and you do not have to go to a neighborhood and say, "This is our offer, take it or leave it." You have a range of bandwidth offerings that suits your need. You may need more upstream bandwidth; you may like more downstream bandwidth. And it's really going be up to the consumer to understand what is appropriate for them so that they feel they're getting the best value.

Pete Pizzutillo:  As you mentioned, we like disruption, right? And we're certainly, I think in that late majority where we're getting the rush and all ... the Netflix, Amazon, and now everybody else is rolling out their content delivery system. It'll be interesting to see when the dust settles. But then I have to think about all the people that still have a wired telephone in their home, right? I mean so how long ... it took me, honestly, I probably got rid of mine like three years ago, but I've had ... and I had FiOS for eight years. I'm sure there are still many hardwired phones out there.  As consumers we are very impatient, but to get us to pull the trigger is going to be interesting to see how that evolves.

Jeff Heynen:  I agree, and just like technologies in general, changing consumer behavior is even a bigger challenge. Once people get locked in in this kind of sea of choices, they don't change very often. And you want to be the package they choose whether it's your broadband service or your mobile phone service, that there are more and more ways to lock consumers in so that their choice, it doesn't mean a switch away from you.

Pete Pizzutillo:  How can people find out more about the five-year forecast?

Jeff Heynen:  Just to go to our www.DellOroGroup.com. And then I think we've got all the latest headlines and some reports synopses listed on the site as well as contact information on how to get access to those reports.  More about the repor can be found here: https://www.delloro.com/news/global-pon-equipment-market-revenue-forecast-to-reach-7-3-b-by-2023/

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