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Hello,
Thanks for your interest in our latest research. You can view a summary of our latest report below.
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The market for telecom network infrastructure (telco NI) vendor products and services grew in 3Q20, surprisingly, despite widespread economic downturns related to the COVID-19 pandemic. For all reporting vendors, telco NI revenues in 3Q20 amounted to $55.6B, up 4.7% from 3Q20. That’s an improvement from negative growth in the prior three quarters. But the improvement is due mainly to revenue surges at Huawei and ZTE, stemming from a Chinese government push to deploy 5G rapidly. For all vendors other than Huawei and ZTE, telco NI revenues declined by 1.4% YoY in 3Q20.
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On an annualized basis, Telco NI vendor revenues totaled $216.3B in 3Q20, down 1.7% from the 3Q19 annualized result. That is broadly consistent with telecom operator spending: annualized telco capex and opex (ex-D&A) declined by 2% and 4% respectively in 3Q20, relative to the 3Q19 results.
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Telco capex pressured in 2020 outside of China
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The telecom industry entered 2020 with high hopes for 5G: telcos hoped for revenue upside from faster speeds and new services, while vendors hoped for an increase in network capex.
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We now have enough evidence from early adopters to suggest that 5G is going to be a long slog, even after the COVID-19 pandemic is resolved. Aggressive marketing and device subsidies may encourage rapid 5G adoption but doesn’t create profitability. As with many technology upgrades, committing rapidly to the new one puts at risk the safer, relatively high margins of the last generation. Consider KT, among the world’s earliest movers in 5G. In 3Q20, KT reported a blended wireless ARPU of 31,620 Won, down from 32,372 in 3Q18, before 5G. KT’s company-wide EBITDA margin in those two quarters was an identical 19.9%, and net income margin a bit lower in 3Q20 (3.8%, v. 4.0% in 3Q18). COVID-19 can’t be ignored, as it has hit the mobile roaming revenues of telcos like KT. But telcos are disappointed with the results nonetheless.
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Global capex in 3Q20 was $70.7B, up $1.2B from the 3Q19 figure of $69.5B. Most operators saw capex fall, however, and have a conservative outlook in their 5G build strategies. China accounts for the 3Q20 growth. In 3Q20, China’s telco capex in 3Q20 was an estimated $14.7B, which is $2.9B higher than the 3Q19 figure. That increment is more than double the overall market’s growth. Without China, global capex declined significantly YoY in 3Q20.
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Top 10 vendors in 3Q20 annualized market
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Overall vendor rankings for the top 10 did not change much in 3Q20, on an annualized basis. Huawei's $46.2B in Telco NI revenues easily beats all rivals, and exceeds the sum of the second and third ranked vendors Ericsson and Nokia. ZTE pushed into fourth place on the back of domestic 5G revenue growth. China Comservice dropped one spot to fifth, but nearly all its revenues are services sold to Chinese telcos, also its main shareholders. Cisco is sixth overall, from fifth in 2Q20 and fourth two years ago. Cisco remains dominant in the router market but a steady decline in telco sales have eroded its overall position. CommScope places 7th, and the only cabling & connectivity vendor (CCV) in the top 10. NEC ranks 8th due to strong positions in Japanese fixed networks and global microwave and submarine markets. Intel and Amdocs round out the top 10 due to sales in telco data centers and 5G equipment, and OSS/BSS, respectively.
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Winners and losers in the 3Q20 market
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CommScope, Capgemini, IBM, Casa Systems, Amdocs and Ribbon Communications were among the vendors with noticeable share gains in 3Q20, but M&A activity played significant roles in all cases. Ericsson's share gain are also due in part to an acquisition (of Kathrein), but more significant is its aggressive bid for 5G business in China.
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Beyond M&A, increased 5G-related spending in Japan helped NEC, ITOCHU, and Fujitsu, while the same factor lifted Huawei and ZTE in the share tables. Restrained fiber construction spending due in part to COVID-19 hurt Prysmian, Fiberhome, and Corning. Share declines at HPE and Cisco are due to competitors’ outpacing them in the areas of cloud native and mobile core deployments, while drops at Nokia and Samsung are in part deliberate. Nokia has stepped back from the China market, and margins have benefited, while Samsung’s network infra division remains focused on a small number of country markets and hence faces revenue volatility. Samsung had a significant 5G win at Verizon recently, though, which should lift its 2021 results.
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Overall, Intel recorded the most significant share increase in 3Q20: up 0.6% vs. 3Q19, on an annualized basis. Despite Intel’s recent hiccups in its chip development pipeline, its bid for telco business has resulted in steady revenue growth in that segment. There are clear signs that Intel is not planning to let up on its telco market push: a recent partnership with IBM’s Red Hat subsidiary, a new CEO hired away from VMWare, and progress in the Open RAN market (e.g. Dish Network, Rakuten).
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Focusing on the hardware/software segment within Telco NI, excluding services, the biggest revenues increases in 3Q20 not related to M&A came from Affirmed Networks (now part of Microsoft), Allot Communications, Calix, DASAN Zhone, Dell Technologies (VMWare), Inseego, Net Insight, Tejas Networks, and Wiwynn.
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Webscale-Telco collaboration becoming major theme within network infrastructure
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Many of the largest webscale providers operate cloud services (e.g. AWS, Azure, and GCP), serving a wide range of vertical markets. Over the last 3 years, the telco sector has become an increasingly important vertical market for webscale services. This telco-webscale collaboration activity has picked up in 2020. WNOs help telcos with service and application development, shifting of workloads, and development and marketing of cloud services. Managing costs is a central purpose of telcos’ willingness to partner with webscale providers. Also, with the emergence of 5G, webscale operators are developing a range of edge compute services aimed at facilitating 5G rollouts and service deployment. Collaborations can involve delivery of a portfolio of 5G edge computing solutions that leverage the telco’s 5G network and the webscale operator’s global cloud coverage, as well as its expertise in areas like Kubernetes, AI/ML, and data analytics.
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All of the key webscale operators have devoted sizable marketing assets towards the telco vertical, often hiring high profile execs with background working for the telco sector. For instance, Google Cloud has an MD for telecom industry solutions, Amol Phadke, who started his career with BT and Alcatel-Lucent. In Phadke’s view, a cloud provider such as Google can help telcos in four areas: monetize infrastructure assets; improve capex/opex efficiency; address customer experience; and, modernize IT infrastructure in order to lower cost of ownership. We expect telco-webscale collaboration to become increasingly important to how telcos deploy and manage their networks over time.
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Outlook: Telco NI vendors have an opportunity for growth in 2021
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In 2021, telco capex is likely to grow 4%, offsetting the decline of 2020. The software component of capex will rise slightly to just under 20%, as software-based features and network automation solutions are more widely deployed. Mobile operators’ 5G rollout plans will get back on track as more spectrum auctions complete and supply chains settle. Bandwidth growth remains strong and will benefit transmission vendors. Fiber buildouts to cell sites and small cell spots will kick up again. Telcos will need help on the services & systems integration side as they step into Open RAN architectures. They’ll also need outside help reaping the benefits of cloud collaborations with the webscale sector. Network operations opex budgets will be a more compelling opportunity for vendors, as telcos layoff more of their own staff and look for efficiencies.
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Vendors with a telco focus are used to coping with tight budgets, and helping their customers with mundane tasks like lowering their cost of operations. In 2020, COVID-19 and a slowdown in 5G deployment have been disappointing to vendors, but far from catastrophic. There is hope in 2021.
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Best regards,
Matt Walker
Chief Analyst
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