Thanks for your interest in our latest research. You can view a summary of our latest report below.

Webscale Network Operators: 4Q19 Market Review

"Webscale networks are centered around immense, “hyperscale” data centers and undersea cable systems that support network traffic from the tech companies' online retail, video, and social media platforms, along with cloud services. Webscale network operators (WNOs) may also own access networks, typically using fiber, microwave or mmWave, and even fixed satellite. WNOs exploring outer space for providing connectivity include Amazon, Apple, Alphabet, Facebook, and Microsoft.
A broad set of vendors are benefiting from WNO capex, from semiconductor players selling into the data center market (Intel, Nvidia, Broadcom, etc), to optical components & transport vendors selling into data center interconnect markets (Ciena, Infinera, Neophotonics, Lumentum, etc.), to contract manufacturers of white box/OCP servers such as Wistron and Quanta.
2019 was a tough year for webscale infrastructure deployments even as R&D investments breach $150B for the first time
After staging a mild recovery in 3Q19 following successive slumps in capex during the first two quarters of 2019, global webscale operators tightened their purse strings again in 4Q19. Capex spend dropped by 5.5% YoY in 4Q19 - a modest slump considering significant declines of 17.5% and 11.4% during 1Q19 and 2Q19, respectively. The falloffs in the three out of four quarters dented capex growth on a full-year basis, posting an overall decline of 8.3% in 2019.
By contrast, R&D investments continued their robust growth journey as most of the “Top 8” WNOs continue to invest heavily in R&D projects across a wide spectrum – from self-developed AI-based chips customized for their data centers to more grandiose moonshot projects such as driverless vehicles. These investments clocked 16.9% YoY growth to post $154.7B in 2019, much higher than capex investments amounting $103.7B in the same year. Despite the capex pause in recent quarters, the long-term growth story for the webscale sector looks intact. The stall in capex spend meant the sector's cash & short-term investments grew by 11.2% YoY in 2019. Top line revenue growth in the sector also inched up to 11.9% in 2019, slightly above the average annual rate of 10.8% during the 2011-19 period.
Spending and investment trends by key operators
A sub-group of important WNOs, the “Top 8”, continues to be important for tracking the sector. This group includes Alibaba, Alphabet, Amazon, Apple, Baidu, Facebook, Microsoft, and Tencent. Four of these accounted for at least 10% of total WNO capex in 2019 - all based in the US: Alphabet, Amazon, Facebook, and Microsoft. Just three out of the Top 8 WNOs, Amazon, Facebook and Tencent, spent more on capex in 2019 than previous year. Reasons for most webscale operators spending less on capex in 2019 have to do with geopolitical uncertainties such as the US-China trade war escalation that impacted the likes of Apple, along with economic slowdown concerns in China that have impacted the domestic duo of Alibaba and Baidu. Also, 2018 was a blockbuster year, when annual capex growth of 48% far exceeded expectations; a drop in 2019 was inevitable. Despite this, a few among the large WNOs splurged on scaling up their webscale buildouts in 2019 as the data volume surge continues:
  1. Alphabet/Google: $13B invested in new data center campuses across the US in 2019 that includes new data centers in Northern Virginia and Tennessee. An additional $3.3B pledged for next two years to expand its data center footprint in Europe
  2. Amazon: cloud expansion by leasing large amounts of new data center space in Northern Virginia reportedly worth $116M, in August 2019
  3. Microsoft: announced plans to build 'zero-carbon' data center in Sweden, in May 2019
  4. Facebook: announced plans to sell wholesale fiber capacity through its subsidiary, Middle Mile Infrastructure, to support carriers and operators on two new fiber routes between its data center campuses in Virginia, Ohio and North Carolina
With respect to R&D spending, webscale operators continued spending more on R&D than capex;  annualized R&D/revenues were 10.7% in 4Q19, ahead of the capex/revenues ratio of 7.1%. Webscale operators are plowing R&D funds into a broad range of tech projects, in both predictable areas like artificial intelligence and IoT, and less obvious areas like healthcare (Amazon and Google), food delivery (Alibaba), and connected cars/self-driving (Baidu). Many webscale operators are designing their own chips now, in potential competition with current suppliers; our "Webscale Playbook" series details these efforts.
Webscale operators continue to branch into new markets, including hardware, both through R&D and acquisitions. M&A activity in the sector marked its best-ever performance in 2019, with Alphabet, Amazon, Microsoft, and HPE each recording sizable related costs. However, IBM's $34B acquisition of Red Hat and SAP's $8B acquisition of Qualtrics stole the show  in 2019. Webscale operators are also beginning to more actively partner with telcos on network projects, with Microsoft leading the way with recent big wins at AT&T and Jio in India. IBM, already a big supplier in the telco segment, will use its Red Hat acquisition to further these aspirations.
Rapid COVID-19 outbreak could escalate an already 'stalled growth' atmosphere going forward
The year 2019 saw most webscale operators being cautious on the spending front due to US-China trade war and economic slowdown concerns in major economies, including the US and China. Just when the US-China trade clash seemed to cool off a bit with the signing of phase one trade deal between two countries in January 2020, the rapid outbreak of coronavirus and its spread worldwide is threatening to push world economy to the brink. The International Monetary Fund (IMF) believes the world has already entered a recession phase and the slowdown could be worse than the global financial crisis of 2007.
For some WNOs, the current situation somewhat presents with a silver lining though, as lockdown measures across major economies have resulted in spike of remote access to cloud-based tools and services. For example, Microsoft's group-collaboration platform, Teams, hit 44 million daily active users from 32 million in a single week in March 2020, amid the pandemic-induced remote working. The tech giant also saw a staggering 775% increase in cloud services usage. However, these tailwinds could be limited to the large WNOs with strong and sizeable cloud businesses and offerings - such as Microsoft, Amazon, and Alphabet. Operators with significant dependence on 'non-cloud' businesses and relatively smaller players will likely restrict their spend on webscale buildouts/data centers in 2020. They must prepare to counter the effects of supply chain and workforce disruptions until pandemic subsides considerably. Apple, for example, which is mainly dependent on iPhone sales, recently conceded via an investor update that the current pandemic outbreak in China is likely to impact its earnings in 1Q20 - this will also have an impact on its capex spending. Also, advertising giant Facebook has halted two data center projects in March 2020 due to coronavirus pandemic. Overall, the WNO sector will witness headwinds outweighing tailwinds as 2020 progresses."
MTN Consulting’s 4Q19 WNO Market Review analyzes the network infrastructure spending and financial position of webscale network operators (WNOs).
WNOs are web-centric companies who own and operate large multi-country communications networks based upon hyperscale data centers and submarine cables. Webscale operators may also own access networks, typically using fixed satellite or fiber. WNOs own network assets in order to support their core businesses, which comprise digital advertising, online retail, cloud, digital media and content services, and other digital-based services. The webscale segment excludes companies with digital business models who rely primarily on rented cloud capacity or collocation space. Twitter, for instance, is not a webscale operator, as its network relies on a mix of rented space in carrier-neutral data centers and rented cloud resources from Google.
WNOs tracked in this report include the “Top 8” companies (Alibaba, Alphabet, Amazon, Apple, Baidu, Facebook, Microsoft, and Tencent) and 12 others: Altaba, ChinaCache, Cognizant, eBay, Fujitsu, HPE, IBM, JD.COM, LinkedIn, Oracle, SAP, and Yandex.
  • Global coverage with company-level drilldowns of 20 companies
  • Company-level annualized and quarterly trends across >10 financial data series
  • Network-related spending estimates at market- and company-level, across quarters
More details are available in the “sample file,” above
Read more
To see our most recently published reports, click here

Best regards,
Matt Walker
Chief Analyst