Telcos Archives – MTN Consulting

Quantifying the energy cost savings from 2G/3G network shutdowns

Posted on 18/10/2022 | 21/04/2023 by Matt Walker

With each passing day, the 2G and 3G layers of telcos’ mobile networks are looming as heavy loads on operating expenses (opex). That’s due to multiple issues but especially energy consumption and related costs. With the existence of a 4G layer in these networks and the coming, if not already deployed, energy-hungry 5G layer, such loads become even heavier. Even before 5G has become widespread, energy costs averaged to about 4% of telco opex in 2021, based on an MTN Consulting study.

Quantifying base station energy costs by generation

Many telcos publish data on their energy consumption, and sometimes provide breakdowns for different parts of the network. But there are no existing estimates on the specific impact of maintaining 2G/3G networks alongside 5G. This blog attempts to quantify the effect of these older 2/3G mobile networks on a typical telco’s energy bill.

To accomplish this, first, we need to have a closer look at overall electrical energy consumption for mobile telcos, and then break down this consumption into parts, identifying what portion of total energy relates to the base station and what parts of the base station consume the most energy.

One complication is that a pure “mobile telco” is rare: most telcos providing mobile services also provide many other services, and operate network assets well beyond the mobile RAN. Some telcos providing mobile services began their lives long ago as fixed operators. Some started as mobile but acquired or built fixed assets to support converged offerings. Some have provided both fixed and mobile services from the start. Some provide cloud or other services mainly aimed at enterprise markets. The energy consumption patterns differ across operator types. Figure 1 illustrates this, for a few large telco groups.

Figure 1: Mobile network as % of total network usage, select telcos

Source: public reports and MTN Consulting estimates

To remove this confusion, we will consider mobile telecom companies that still rely exclusively on providing mobile telecom services. For such operators, the mobile network accounts for about 90% of total company energy consumption and costs. There is some limited variation around this 90% figure, due to vendor choice, network topology, and traffic mix, but 90% is a reasonable estimate.

Taking KDDI as an example from Figure 1, this company provides a range of services that are not mobile related; MTN Consulting estimates that KDDI’s mobile network accounts for only about 60% of total company energy consumption. But for Zain, this ratio is 93% as this company is almost exclusively focused on mobile services.

After concluding that about 90% of a mobile-only network provider’s energy consumption is from the mobile network, we need to dive deeper inside the mobile network to find the network elements that contribute most directly to energy consumption.

The mobile network consists of different parts like core, transport, and base stations. As shown in Figure 2, the base stations, or the mobile radio access network (mobile RAN), account for about 57% of network energy consumption for a mobile operator. Expressed differently, the mobile RAN accounts for about 51.3% (i.e. 90% * 57%) of total company energy consumption for a mobile-only operator, such as Zain.

Figure 2: Base station’s contribution to mobile network energy consumption

Source: IEEE Communications Surveys and Tutorials

Now we need to examine the base station and have a closer look at the base station elements and their corresponding energy consumption. As shown in figure 3, the base station element that consumes the largest portion of energy is the power amplifier (PA), which consumes around 75% of total base station energy consumption as shown in figure 3.

Figure 3: Base station energy consumption distribution by network element

Source: Journal of Energy

As shown above, the power amplifier element is the biggest energy consumer in a mobile-only telco network. The power amplifier accounts for about 38% of total company energy consumption: 75% * 57% * 90%. So if a mobile network operator turns off the 2G network layer, the bulk of energy savings will come from shutting down the power amplifier that corresponds to the 2G network.

Now that we have quantified the amplifier’s contribution to total energy use, will this 38% figure be enough to measure the benefits of shutting down the 2G and 3G layers? Actually, we still need one more number: the energy consumption of the power amplifier for each technology. In other words, what is the energy consumption percentage for each of these technology layers? Let us have a look at this in Figure 4.

Figure 4 is a presentation of the key components in a base station and their typical energy consumption, in three different network configurations. The columns show the configuration of a typical base station, and the rows are the affecting elements, mainly the power amplifiers. The gray colored boxes are the elements needed for the 2G and the 3G layer, blue colored boxes are the elements needed for the 4G layer, green colored boxes are the elements needed for 2G, 3G, and 4G, and lastly, the orange colored boxes are elements needed for the 5G layer.

Figure 4: Energy consumption of key components in a base station, across three network configurations

Sources: MTN Consulting; Huawei Technologies

The values inside the elements represent the maximum energy consumption of that element. So as shown in figure 4, in 2G/3G only, the base station consumes 3.9kWh. By adding a 4G layer onto the base station, you increase the energy consumption of this base station by 51%. By adding a 5G layer on top of the 2G, 3G and 4G base station, you can expect another 66% increase in energy consumption. The red arrows in Figure 4 indicate these increases in maximum energy consumption.

That 66% figure illustrates one thing that is scary about 5G: yes, it may offer revenue upside, but it also consumes lots of power to operate 5G, which costs money and has climate impacts.

For this blog, though, what we really need to know is the contribution to total energy consumption of the legacy network elements as you upgrade to newer technology. These values are presented in figure 4 in the yellow arrows. So, in 2G/3G/4G base stations, about 40% additional energy is consumed by holding on to the 2G and the 3G layer. Similarly, in a combined 2G/3G/4G/5G base station, roughly 24% extra energy is consumed because of still holding the 2G and the 3G layers in this base station.

We now have the estimates we need to find the impact of supporting the 2G/3G network layers alongside 4G/5G for a typical mobile operator.

Approaches to 2G/3G network shutdowns vary depending on current network design

Right now telcos are wrestling with the best way to deal with legacy networks, while they upgrade to 5G. The ideal solution depends on the current position of the operator’s network. In the following table, you can see some potential paths to 2G/3G network shutdowns and the impact on energy consumption. In the first scenario, where the telco currently has only 2G and 3G network layers, an upgrade straight to 5G would result in an approximate 50% reduction in energy costs. In the last scenario shown on the bottom of the table, where an operator is simultaneously operating 2G, 3G, 4G, and 5G networks, the ideal solution is to shut down the 2G and 3G layers. This would save an estimated 40% in base station energy consumption.

Of course, energy costs are not the only factor in planning 2G/3G network shutdowns: spectrum, regulatory, legacy service revenue, and other factors also matter. But telcos nowadays are very focused on reducing their opex burden whenever possible, given weak revenue growth. As such, energy costs are a central focus of most telcos.

Table 1: Energy usage impact of 2G/3G shutdown scenarios

Mobile network’s current scope	Likely migration path for 2G/3G shutdowns	% reduction in energy use for typical base station
2G and 3G network	Upgrade straight to 5G, bypassing 4G, then shut down both 2G and 3G	50.0%
2G and 4G network	Upgrade to 5G then shut down the 2G layer	30.1%
3G and 4G network	Upgrade to 5G, then shut down the 3G layer	33.2%
2G, 3G and 4G network	Upgrade to 5G, then shut down both 2G and 3G layers	39.9%
3G, 4G and 5G network	After upgrading all sites to 5G, shut down the 3G layer	33.2%
2G, 4G and 5G network	After upgrading all sites to 5G, shut down the 2G layer	30.1%
2G, 3G, 4G and 5G network	The operator is ready to shutdown both the 2G layer and the 3G layers	39.9%

Source: MTN Consulting

The above table represents cost savings for the “typical” mobile-only telco we described early in the blog. In follow-up blogs, we expect to detail the impacts of 2G/3G network shutdowns for a few specific mobile operators in different regions of the world.

The author, Samir Ahmad, is a telecommunications and IT consultant based in Amman, Jordan. Samir has a Master’s in Telecommunication, Electrical, Electronics, and Communications Engineering, from the University of Sydney, and a B.S. in Electrical Engineering – Communications & Electronics, from the Jordan University of Science & Technology. Prior to entering the consulting field in 2017, Samir worked for Zain Jordan for 8+ years, most recently as Expert, RF Planning and Optimization.

Telco capital intensity hits 10 year peak in 2Q22

Posted on 06/09/2022 | 20/04/2023 by Matt Walker

Vendors continue to wrestle with supply chain constraints in the telecom sector. That’s clear from several recent vendor earnings reports, including those issued by Dell, HPE, and Ciena in recent weeks. Telco spending, though, has surged in recent quarters. With 2Q22 results now compiled, the industry has reached a new capex peak. For the 12 months ended June 2022, telco capex was $329.5 billion (B), while the ratio of capex to revenues (i.e. capital intensity) was 17.8%. Both figures represent new record highs, at least for the 46 quarter (11.5 year) period that MTN Consulting data covers (1Q11-2Q22).

On the supply side, vendors selling into the telco vertical are seeing some growth, in aggregate. For the broadly defined “telco network infrastructure” (telco NI) market, revenues were $60.1B in 2Q22 (up 4.1% YoY), or $237.6B on an annualized basis, up 6.7% YoY. The telco NI market includes some vendor revenue streams which dip into telco opex, not capex, but there is usually a correlation between total capex and vendor revenues.

The figure below illustrates telco capital intensity over the last several years.

What’s behind recent capex growth

One factor behind the recent capex spending spike is a post-COVID bump. Economies shutdown during COVID, depressing network spend. The capital intensity effect is shown in the figure, above (“COVID slide”). Capex also dropped in absolute terms. Annualized capex bottomed out at $299.8B in 2Q20. Some of the current growth is just making up for lost time. The quarterly average hasn’t changed much, if you expand the time horizon. For the last ten quarters, from 1Q20 (the onset of COVID) through 2Q22, telco capex averaged out to about $77.9B per quarter. For the ten pre-COVID quarters, the average was $78.5B.

Another factor is many telcos are scaling up initially small 5G deployments, and beginning to build out 5G SA core networks. 5G RAN builds have been underway for several years, but the spending has been small to start due both to the software-centric nature of 5G networks and telcos’ desire to wait for new revenue models to emerge. Incidentally, a shift to 5G core spending tends to benefit a different type of vendor – not just the Ericssons and Nokias of the world. Cloud providers AWS, Azure and GCP, for instance, are all actively involved in helping telcos with 5G core migrations. Their collective revenues in the telco vertical were about $3.4B for the 12 months ended June 2022, up nearly 80% YoY. Many of the vendors involved in this are less vulnerable to supply chain issues.

Another capex plus: fiber spending is strong in a number of markets, especially the US but also in Europe, Australia, China, and India. That’s to support FTTx deployments but also to connect together all the new radio infrastructure needed to support 5G. Government subsidies and other investment incentives are a factor as well. Vendors focused on fiber optics are seeing strong growth right now. For instance, Corning and Clearfield saw their telco vertical revenues grow by 25% and 84% YoY in 2Q22, respectively.

Supply chain limitations have a mixed effect. They sometimes mean delay or cancellation of projects, which cuts capex in the short term. They also can mean price increases, though, as telcos push suppliers to accelerate timelines or adjust designs to work with available alternatives. This can result in projects costing more than expected. Let’s not forget, though, that a huge portion of telco spend is unaffected by current supply chain constraints. Services- and software- focused vendors – like Accenture, Amdocs, IBM, Infosys, TCS and Tech Mahindra – are not citing supply chain issues as a drag on results.

Inflation is a bit more straightforward. This has impacted the entire telecom food chain, from chips to components to systems to services. All else equal it causes an increase in US$ capex, though the impact on capital intensity is less clear.

Finally, there’s China. Given how closed a market this is, there’s not as much attention paid to it nowadays. But China’s capex has been growing recently. For the 2Q22 annualized period, Chinese telco capex totaled $58.3B, up 12% from 2Q21. That growth comes despite efforts to share costs on the network side.

China is also relevant to the vendor share question. Huawei continues to rank at the top of the global telco network infrastructure (telco NI) market. For the 2Q22 annualized period, we estimate its telco NI share at 18.7%, far ahead of Ericsson (10.9%) and Nokia (8.9%). This surprises some, as Huawei has become a non-factor in many markets over the last two years. Yet Huawei’s stability is no mystery. It’s dominant at home, and local telcos have been spending big, and steering more of their capex dollars to local suppliers over the last couple of years. Huawei also has a huge customer list overseas – these revenue streams don’t just disappear overnight, especially since many telcos remain loyal to the vendor.

Hardware hit hardest in supply chain crunch

Vendors recorded about $237.6B in sales to the telco vertical for the 2Q22 annualized period. This is a huge market, with many different players; MTN Consulting stats track 132. Some supply the latest and greatest hardware innovations. They often have high margins but can also be subject to supply chain hiccups. Vendors specializing in solutions which revolve more around software and/or services tend to have different constraints. Labor cost and availability is always a concern, but hardware is rarely an issue. We believe the current supply chain disruptions will improve in the next couple of quarters, though. Even those vendors hit by short-term supply issues are generally optimistic. For instance, Gary Smith, Ciena’s CEO, noted last week that “Despite supply chain challenges and elongated lead times, strong secular demand trends show no signs of abating. And we remain confident that the fundamental macro drivers propelling this demand are durable over the long term.”

The biggest near-term risk to that is China’s ongoing series of COVID shutdowns. Longer term, the bigger risk is any interruption to Taiwan’s ability to continue functioning as an independent, self-governing country – it plays a key role in the telecom supply chain, and that of many other sectors. This issue is the elephant in the room that few like to address, but all vendors need to have a plan for this worst case scenario.

Source of cover image: iStock

Vendor landscape continues to shift in telecom market as cloud and 5G scale

Posted on 29/07/2022 | 20/04/2023 by Matt Walker

Telco network spending has been on the rise over the last few quarters. Vendor sales of network infrastructure to the telco vertical (“Telco NI”) totaled $55.5B in 1Q22, up 5.7% YoY. On an annualized basis, Telco NI revenues through 1Q22 were $234.8B, the highest total in our 1Q13-1Q22 database and 6.8% higher than the 1Q21 annualized figure. Telco capex has been strong the last few quarters, and vendors are benefiting. The growth is not dramatic, but any kind of growth at all in telecom is a plus, and often a surprise.

As telco spending has risen post-COVID, the top few vendors remain at the top. While share always varies a bit by quarter, the biggest five network equipment providers (NEPs; excludes China Comservice) have collectively accounted for about 50% of the Telco NI market over the last few years. Figure 1 shows annualized share evolution for these vendors, from 1Q19 through 1Q22.

Figure 1: Annualized market share of top 5 NEPs in the telco vertical, 1Q19-1Q22

Source: MTN Consulting

While the top 5 remain the same and their aggregate share of wallet is stable, there are some significant shifts underway in the vendor landscape.

What drives these shifts? Some are driven by financial machinations or politics, but most are aimed at improving competitive positioning. More specifically, improving a vendor’s ability to address key customer needs. In the telco vertical, these include: deploying telco cloud functions and architectures; monetizing new network capabilities, in particular 5G; lowering the cost of transport and routing; improving the energy efficiency of networks; automating networks; lowering the cost of customer acquisition and retention; and, developing revenue streams in new areas like mobile payments, digital advertising, home networking, connected cars and security. There are probably more shifts underway nowadays because 5G cores are beginning to be implemented in a big way, and Huawei’s problems continue to open up new opportunities for smaller vendors.

Most of the shifts in the vendor landscape involve smaller players, outside the top 5. Ericsson’s acquisition of Vonage is an exception; MTN Consulting published a blog post on this deal in May. Setting aside the top 5, ongoing changes in the vendor landscape fall into a few broad categories.

Growth of the cloud providers

Alphabet (GCP), Amazon (AWS), and Microsoft (Azure) together booked approximately $3 billion in revenues to the telco vertical for the 1Q22 annualized period, from less than half a billion USD in 2Q18-1Q19. They now partner with telcos on a range of areas, as MTN Consulting mapped out in the report “Telcos aim for the cloud by partnering with webscale cloud providers.” Their aggregate share of Telco NI is now about 1.3%, around the same as Accenture and a bit more than IBM. They have a long way to go, but they are already making a dent in the market and continue to invest heavily in the telco vertical.

Most of the cloud providers’ success in telecom stems from organic investment, but not all; Microsoft has completed three acquisitions that accelerated its push into telecom: Affirmed Networks, Metaswitch, and AT&T’s Network Cloud.

Vendor partnerships with webscalers

As webscalers began to make a real dent in the telecom market in 2020, traditional telco-facing vendors realized they could benefit from some joint development and marketing ventures with the webscalers. That was especially apparent as telcos began to deploy 5G cores and needed cloud smarts from their suppliers. Over the last three years, most big telco-focused vendors have entered into partnerships with traditional telco-facing vendors like Ericsson, Nokia, NEC, Fujitsu, and Amdocs. Some of these are generic, some are customized for specific large telco accounts, e.g. Telecom Italia.

Restructuring and realignment

Dell, including its majority holding in VMWare, saw its revenues in the telco vertical rise steadily in the 2019-21 period. The company’s 2021 revenues in telecom amounted to just over $2.7B. VMWare is responsible for much of this, boosted by its Telco Cloud offerings. Late last year, Dell spun out its majority holding in VMWare. This was aimed partly at raising cash, but also at creating more value in VMWare, which has a different business model and profit margins than parent Dell. The two retain strong connections and partnerships, including in the telco space.

Since the Dell-VMWare spin-off in 4Q21, a bigger shift has occurred: in May 2022, Broadcom agreed to acquire VMWare, for $61 billion. Broadcom says the deal will combine its software portfolio with VMWare’s multi-cloud offerings. Telco is only one of many reasons for this deal, not a central one. Prior to the deal, Broadcom alone did have some small position in Telco NI, due largely to previous acquisitions (Brocade, and CA Technologies). The synergies involved in this deal seem questionable, but importantly Broadcom claims it will allow VMWare to operate with a degree of independence.

In the same quarter as Dell’s spinoff of VMWare, IBM separated its services group into a new company, Kyndryl. This deal was also driven by an interest in separating two companies with significantly different business models and profit margins. Both go after telco business though. Red Hat is at the core of IBM’s efforts to improve its penetration of the telco sector, and it has had some success. Kyndryl inherits many relationships with telcos cultivated by IBM’s services group over the years. That includes deals with Bharti in India, including a blockbuster $1.4B deal for IT operations outsourcing, way back in 2004. Interestingly, 5G monetization is front and center of Kyndryl’s messaging for the telco vertical, which is a similar driver to what’s behind Ericsson-Vonage.

Still pending: CommScope has been attempting to spin out its Home (CPE) division for several quarters, but there is no confirmed buyer. There’s some chance that the company will just reintegrate the division, as options are limited. Acquisition by private equity is likely being considered, though.

Telcos investing directly in technology supply

There are a few cases of telcos either creating a vendor in-house or acquiring a large ownership stake in one which already exists:

Rakuten Symphony: Rakuten’s creation of Symphony is most notable in recent years – the highest stakes, and probably the most expensive. Payoffs may be many years down the road, as more telcos consider open RAN for brownfield networks and Symphony develops more of a track record.
Tata Sons-Tejas Networks: Tejas Networks sold a controlling stake (43.4%) in July 2021 to Tata Sons group, which wants to help Tejas grow. The Tata group includes a telecom division, Tata Communications, with $2.3B in 2021 revenues, making it India’s fourth largest private telco. Tejas is focused on optical networks.
Verizon-Casa: in April 2022, Verizon announced it would invest $40M in one of its smaller vendors, Casa Systems, at the same time as agreeing to a multi-year contract.
NTT-NEC: further back, in June 2020, NTT announced a $560M investment into key supplier NEC, for a 4.8% stake in the company. This aimed partly at helping NEC expand its 5G offerings and leverage an opening in the global market for wireless technology opened up when Huawei began to face supply chain and political constraints in 2019-20.

Vendor-vendor M&A deals

The vendor landscape also continues to be impacted by more traditional M&A deals, where a vendor acquires another technology supplier. Some of the recent transactions include:

NEC: this Japanese vendor has committed to expand in the mobile technology space, with focus on open RAN. Earlier in July, NEC agreed to acquire Aspire Technology Unlimited, an Ireland-based systems integrator, to help with this pursuit.
ADVA-Adtran: these two small but profitable wireline vendors announced plans to merge in late 2021, and the deal just closed. The new company, ADTRAN Holdings, may have a leg up in pursuing the many transport network upgrades and broadband access buildouts underway worldwide right now. The new ADTRAN may also be better able to deal with supply chain constraints, which continue to be an issue for smaller NEPs.
Sterlite: this India-based optical supplier has been growing over the last few quarters, exploring overseas markets for fiber optics, launching a small range of wireless products, and acquiring a UK-based systems integrator, Clearcomm Group, in 2021.
Accenture: has spent heavily on a wide range of acquisitions in the last two years, across industry verticals. Deals impacting telecom include Arca, a Spanish engineering services company, in 2020; umlaut, a German network engineering, testing and analytics company, in 2021; and Advocate Networks, a technology consultancy and managed services provider, in 2022.
Aviat-Ceragon: most mergers are friendly, where both sides agree. As Elon Musk’s attempted purchase of Twitter reminded the world, there are also less friendly forms of acquisition. This Aviat-Ceragon deal is basically a hostile takeover of Ceragon, proposed by Aviat. It’s still pending and the two parties may not come to agreement. However, the motive is worth noting. Aviat’s hope is that the deal would give the combined company more scale and better margins, and a stronger ability to compete with Huawei, Ericsson and Nokia in the wireless transport space as opportunities arise for 5G backhaul & fronthaul and support for private wireless networks.

Finally, one significant acquisition involves a large established telco-facing vendor acquiring telco assets. In September 2021, Ciena acquired AT&T’s “Vyatta” virtual switching and routing technology. As Ciena said at the time, the deal aims to address “the growing market opportunity to transform the edge, including 5G networks and cloud environments.” Many shifts in the vendor landscape aim at this same opportunity.

Photo by Hans-Peter Gauster on Unsplash

Telecom’s top 3 vendors betting big on enterprise expansion; Huawei has early lead

Posted on 14/06/2022 | 25/04/2023 by Matt Walker

Telco NI’s top 3

Telcos buy products & services from dozens of different vendors. Our research tracks 130. Some are relatively easy to classify into a segment, e.g. Corning, a “cabling & connectivity” vendor in our terminology. Most are much harder. Even those which may once have been called NEPs (network equipment providers), such as Ericsson, went beyond the implications of this term long ago. They also provide software and services, and most of their future development – measured by both R&D spend and acquisitions – is targeted towards software and the cloud.

Setting aside the vendor classifications, there is less dispute about who the overall top suppliers are in telecom. According to MTN Consulting’s most recent vendor share report on this “telco network infrastructure” (telco NI) market, the top 3 are Huawei, Ericsson, and Nokia. Nobody else comes close. ZTE and Cisco round out the top 5, if you set aside the strange creature that is China Comservice, a services specialist which is majority-owned by China’s telcos. Figure 1 illustrates recent trends in annualized telco NI revenues for these top 5.

Figure 1: Vendor revenues in telco vertical, annualized ($B)

Source: MTN Consulting

Top 3 trying to expand beyond telecom

Focusing on the top 3, all face challenges related to addressable market. For Ericsson and Nokia, the common issue is that telco spending is relatively flat, even with the occasional growth spurt from a new generation of technology (e.g. 5G RAN). For Huawei, the problem is due to US-driven supply chain restrictions and boycotts by a number of countries that used to be important markets for the vendor.

Prior to Huawei’s current issues, its diversification was impressive, as its huge consumer business helped offset some of the risk in focusing on one primary market, telcos. But Huawei’s consumer business revenues have collapsed in the last 2 years: they ended 1Q22 at approximately 209.7B RMB (annualized), from 462.9B RMB in the 1Q20 annualized period. Its carrier revenues have also fallen, as overseas telcos have been reticent to commit, but the drop is modest due to strong support from Chinese telcos and key overseas partners. Still, the writing is on the wall. Huawei recognized two years ago that it needed to reinvent itself, committing more to R&D and exploring new business opportunities beyond telco. One major focus is finding ways to expand its enterprise market. Its starting point in this expansion is a strong position in global optical and IP markets, and a solid offering for data centers. The company’s April analyst event made clear that its datacom group would play a central role in attacking the enterprise (CloudCampus, SD-WAN, Wi-Fi 6 and 7, etc.), as would Huawei Cloud.

Both Ericsson and Nokia also view enterprise as important. Ericsson is focused mainly on private wireless, and acquired Cradlepoint in large part to pursue this opportunity. Ericsson’s microwave transport gear, security and software, and IoT solutions also have applications outside the telco. Nokia has a larger enterprise business to begin with. It’s also pursuing private wireless, and trying to leverage its wireline gear (optical and IP) further into enterprise markets. It also has had success in the webscale market, including a data center switching at Microsoft recently.

Figure 2 illustrates the revenue breakdown for these three vendors into several major categories: telco, enterprise, consumer, IP licensing, and all other.

Figure 2: Annualized revenues by market, % total (2Q21-1Q22)

Source: MTN Consulting

As shown above, Huawei gets less than half its corporate revenues from telcos, even after Consumer’s decline. What may surprise some is how much of its revenue base comes from enterprise. For the 1Q22 annualized period, the enterprise market accounted for 18% of Huawei revenues. Nokia and Ericsson recorded 7% and 4%, respectively.

Moreover, enterprise as a percent of total revenues was about the same for Ericsson and Nokia two years ago, in the 1Q20 annualized period. For Huawei, though, enterprise has nearly doubled, from about 9.7% in 2Q19-1Q20 to 18.2% in the most recent four quarters. As Huawei has faced pressure in other markets, the enterprise has proved to be more resilient. And Huawei has plowed new resources into enterprise to grow it further.

The enterprise is not a hobby

To date, Huawei’s big enterprise wins are mostly in China. For the company overall, 65% of 2021 revenues were in China. It’s likely that well over 80% of enterprise division revenues are in China. But this was true of Huawei’s carrier group revenues in the early years. With any new product line or market, Huawei has usually penetrated Chinese accounts first while it has ramped up resources overseas to support an expansion.

Clearly there is no guarantee that Huawei’s enterprise group will thrive outside China. For larger enterprises subject to public pressure, some will still be concerned about the politics of picking Huawei. Even without concerns about appearances, Huawei’s reputation has taken a hit over the last couple of years, which it is working to overcome. Another challenge is channels. Even for the large enterprise targets – such as big banks, government agencies, railways, and energy companies – Huawei will need to rely on channel partners. It can’t develop its own internal team as it did with telco; there are too many enterprises, and the average size is too small. Huawei needs to identify the best country and vertical markets to attack, and develop a network of trusted, certified partners to both sell into this market and support it after the sale. Enterprise market leader Cisco has invested heavily in building and maintaining its network of channel partners for decades. Huawei also has to battle numerous vendors with established positions in specific enterprise verticals (e.g. energy) or product areas (e.g. Ethernet switching).

All this won’t be easy, but don’t count out Huawei. It has exceeded expectations many times in the past, and views the enterprise as crucial to growth. One indicator of the importance of the enterprise market to Huawei is its leadership. For most of the last half of the 2010s through 2020, Yan Li Da served as Enterprise group president. Yan was in charge of international marketing for Huawei’s early 2000s push into overseas optical markets. That push was key to Huawei initially establishing its name in the global telecom market. Yan is now on Huawei’s board of directors.

Cover image: Marvin Meyer on Unsplash

After failure to adapt to 4G, telcos need to evolve

Posted on 19/05/2022 | 20/04/2023 by Matt Walker

It was the Greek philosopher Heraclitus who coined the phrase, “Change is the only constant in life.”

Well over a thousand years later, Benjamin Franklin continued the thought, saying, “When you are finished changing, you are finished.”

From the wheel to the internet and beyond, the need for change, for new ideas, new technologies, has been a defining element of humanity. Through trial and error, innovators conceive of an idea, conduct research, prove their hypotheses, and develop and refine their concepts. Such research and development have become absolutely vital to the success of the telecommunications industry. Without R&D, humanity might never have evolved past the rotary-dial telephone. There would be no internet, no cell phones, none of the technological marvels we often take for granted … amazing tools that our predecessors likely could not have envisioned even in their dreams.

Or… perhaps they did. After all, the myriad technologies of science fiction are continually becoming science fact. For example, many of the technologies of the original “Star Trek” are commonplace today. The communicators, viewscreens and tricorders of that fictional future exist today as cell phones, laptops, video chats, and advanced sensor packages.

AT&T is another example. Back in 1993, the telecommunications provider (telco) aired commercials that examined what its researchers were developing, and extrapolated the impact of those technologies on the future. The commercials accurately predicted global positioning systems, laptops, tablets, smart watches, keyless entry and on-demand video entertainment … in an era before most homes even had internet connections or home computers.

That was nearly three decades ago. In the time since, you’d expect that AT&T would be spending more on R&D, particularly this far into the digital age.

You’d be wrong.

From 2000 to 2021, AT&T’s annual spending on R&D hovered between 0.7 percent to 1.3 percent of its total revenue. For 16 of those 22 years, AT&T’s R&D expenditures remained less than 1 percent of the company’s total revenue.

Surprised?

Don’t be.

Other telcos show much the same spending pattern. From 2018 to 2020, SK Telecom spent an annual average of a mere 2.2 percent of its revenue for R&D expenses. Telefonica spent less, at 2 percent. NTT spent 1.9 percent; Chunghwa Telecom, 1.8 percent; Orange, 1.6 percent; Comcast and KT Corp., 1.1 percent; and China Telecom, 1.0 percent. Most others, including AT&T (0.7 percent) and LG Uplus (0.4 percent), spent less than one percent of their overall revenue on R&D.

“Telcos (tend to) spend very little on R&D, instead relying mainly on their suppliers for innovation,” Matt Walker, chief analyst at MTN Consulting. “The world has hundreds of telcos but only a few dozen significant suppliers, so some of this is inevitable. The smaller telcos can’t afford to do it all themselves,” said Walker, as they often lack the staffing or the financial resources to conduct their own R&D.

On top of their lack of spending, telcos are also largely slow to innovate. When 4G wireless debuted, telcos rejoiced at the idea of earning new revenues from the networks, which were expensive. However, the majority of the revenue from the new networks went to the companies that build telecommunications devices, like Apple; app companies; content providers, like Netflix; and cloud services companies. This left telcos out in the cold, as they could buy the technology needed to provide 4G, but not truly profit from it.

When 5G networks emerged, the telcos spent big, again hoping for a revenue upside from the investment. Thus far, however, they are in the same position where 4G left them … not benefitting financially, and still wary of spending much on their own innovation and R&D.

“This arrangement worked alright when telcos had limited competition from other sectors,” Walker noted. “However, in the last five years or so, these new ‘big tech’/webscale players have begun encroaching on different aspects of the telco turf.”

Are telcos doomed to repeat the same mistakes? Hopefully not.

Should they be spending more on R&D to help develop new revenue streams? Yes.

Are there examples of leaders in the sector to learn from? Yes.

Telcos should not have to wait on their downstream vendors to innovate and create new technologies, from which they can benefit. Instead, they should take advantage of the growing and rapidly evolving technologies and innovate on their own.

Indeed, some industry leaders are already beginning to call for such a paradigm shift. Aaron Boasman-Patel, vice president of AI & Customer Experience at TM Forum, and Brian Smyth, Accenture’s Global Comms & Media Innovation Lead, conducted research on the matter, the results of which they published in their white paper, “The tech-driven telco.”

“At the most basic level, the world has changed since the telco business model was introduced,” said Smyth. “… At Accenture, we see three mega trends, the first one being the customer – so how we live our life, how we engage with civil society and government, how we work; the second being business model reinvention, … how technology transforms not only customer experiences, but also how customers buy into products and services. We’re seeing within this also a big focus on partnership and partnering together with other organizations to offer new services and experiences.”

“And then finally, it’s the technology revolution. So, in telcos a lot of talk today is around 5G, edge networks, and a lot of this is the confluence of these three points of customer imagination, reinvention, and the technology revolution I think are all leading to this transformation from the traditional telco” to a more tech-driven model.”

Added Boasman-Patel, “If you don’t evolve, then you’re not going to be able to take a slice of the pie – the $700 billion worth of new revenues which are out there today. … If you think about, what we’ve seen through the pandemic, telecoms shares have increased by about 4.8 percent compared to other industries like semiconductors and electronics up by nearly 50 percent, media technology, high 35 percent. … I think when you get above 20% of (revenue spending), whether in industrial manufacturing, or sensor management or whatever it may be, that’s where you can start to say you have become a true techco,” he said.

In November 2021, Ericsson, the world’s second-largest supplier of technology to telcos, surprised many observers by announcing that it was purchasing Vonage, a cloud communications company. That one company would acquire another is standard fare for financial news. Also, it wouldn’t be unprecedented for a telco to buy one of its vendors. The November deal, however, was the reverse: Ericsson, a vendor/supplier to telcos, was buying Vonage, a telco.

“That deal was surprising because it was a traditional vendor buying what seemed to be a telecom provider/telco, i.e. Vonage,” noted Walker.

Unlike the typical telco, vendors do usually spend quite a bit on R&D. Ericsson, for example, spent an annual average of 17 percent of its revenue for 2019-2021. Many others spend less, including Alphabet and ZTE (15 percent each); Microsoft (13 percent); Amazon (12 percent); Samsung (9 percent) and IBM (8 percent). In contrast, Ribbon Communications spent 24 percent; Juniper Networks (21 percent); Nokia (19 percent); and Huawei (18 percent). Alphabet and Microsoft are included in these figures because their cloud divisions GCP and Azure, respectively) have become important suppliers to telcos.

Figure 1: R&D spending as % of revenues for select Telco NI vendors, 2019-21 average

Source: MTN Consulting

Ericsson made the $6.2 billion deal in the hopes that, if approved by regulators, its acquisition will help it work with telcos to better monetize apps and services. Ericsson has mapped out a plan to help their telco customers get new sources of revenue from the new networks currently being built. Its acquisition of Vonage means that it now has a telco subsidiary with a dedicated R&D mission. Indeed, unlike the regular low numbers shown at other telcos, Vonage’s R&D numbers tend to trend higher. In 2011, Vonage spent 1.8 percent of its revenue of R&D. In 2014, that number rose to 2.4 percent. In 2019, it hit 5.8 percent, then rose to a high of 6.5 percent in 2020 before dipping to 5.7 percent.

Indeed, Vonage hews closer to the “techco” model favored by Boasman-Patel and Smyth than it does to that of a standard telco model.

“I think mindsets are really important here to drive that change,” said Smyth. “A really interesting example is Microsoft. When Satya Nadella took over Microsoft in 2014, at that point they were hugely profitable as an organization, but not very exciting. And Satya talked about actually wanting to build an organization and products and services that customers would love. And they had missed big trends at this point. They had missed things like search (engines) and mobile, and a lot of people were questioning whether Microsoft’s best days were really behind it at that point, where he came in with this focus on building this growth mindset.

Smyth continued, “The growth mindset is actually … about shifting from the sort of know-it-all to the learn-it -all mindset and being hungry and open to change and collaboration. And what we’ve seen since is a 10x growth in the market cap of Microsoft. And an incredible performance and a complete refresh of the brand, attracting young talent, attracting the next generation of sort of leaders across new technology domains and re-cementing their position in future technologies, whether it’s cloud, or now looking at the metaverse.”

Vonage, like Microsoft, leaned into its own evolution.

“Vonage was no longer just a telco” by the time Ericsson announced the acquisition deal in 2021, said Walker. “It started life as this, but had evolved more into a hybrid in the last five years, creating lots of its own intellectual properties (IP). From 2018 to 2021, Vonage spent about 6 percent of revenues on R&D, way higher than the average telco, and closer to a vendor.”

Indeed, Vonage’s most recent annual report tells the story of its evolution from telco to techco: ““Founded in 2001, Vonage was among the first companies to provide Voice over Internet Protocol technology offering feature-rich, low-cost home phone services. Through a series of strategic acquisitions and organic growth, Vonage since has transformed from a VoIP-based residential service provider to a global leader in business cloud communications.”

Vonage also has a long list of patents, which helps fuel its innovations.

“Vonage does some things that don’t look like what a vendor (Ericsson) would normally do,” noted Walker. “But Vonage’s R&D creations (will) allow Ericsson, in theory, to provide valuable support to its other telco customers in an important area, i.e. monetizing the network through use of APIs,” or Application Programming Interfaces, which permit different applications to communicate.

Although most U.S. telcos continue to play it safe, telcos in the United Kingdom have begun to increase their R&D sending. In 2020, they spent over 1 billion pounds (1.2 billion pounds, or $1.56 billion USD) on R&D … the first time they have done so in nearly 10 years.

According to the British Office for National Statistics, the telco sector boosted its R&D spending by 4.5 percent during 2020, to 1.03 billion pounds. They last spent that type of money on R&D in 2011, when they spent 1.04 billion pounds.

However, not surprisingly for a time during a pandemic, UK R&D spending by telcos and all other industries remained in the shadow of pharmaceutical sector, which boosted its R&D spending by 6 percent to 5.02 billion pounds ($6.19 billion USD).

“There’s a demand from industry to actually partner and collaborate with (communications service providers) to build out these new services,” said Smyth. “… It’s quite interesting from some of the initial feedback we’re hearing there is a desire on the CSP side to really just offer connectivity solutions, sell connectivity. So, I think what industry is looking for is support in solving their business problems. And I think there’s great opportunity for CSPs as they’re building the scalable platforms to actually go in and partner and co-create with industry to build solutions.”

4G set sail some years ago, and telcos largely missed the boat. It’s still relatively early in the rise and growth of 5G. Hopefully, telcos will learn from the mistakes they made with 4G. If they prioritize creating and funding new R&D initiatives, they can evolve into more technology-driven companies. This will allow them to benefit, in terms of technology and revenues, from 5G.

It’s not too late for telcos to fully get on board with 5G … before that opportunity also sails out of reach.

About the author

Melvin Bankhead III is the founder of MB Ink Media Relations, a boutique public relations firm based in Buffalo, New York. An experienced journalist, he is the president of the Buffalo Association of Black Journalists, and a former editor at The Buffalo News.

Cover image: iStock

Telcos are upgrading their workforce, but it comes at a price

Posted on 11/05/2022 | 17/11/2023 by Matt Walker

One of the many telecom stats we track is “labor costs”, i.e. what telcos spend in salaries and benefits to support their workforce. Not a lot of other analyst firms track labor costs, if any. It’s not an easy one to track, as telcos aren’t required to report it, and the data can be hidden. But it is essential to understanding the telco’s business and challenges they face.

What’s important to know about labor costs and the telco workforce in general?

Labor costs represent a lot of money. The capex spent by telcos on their networks gets lots of attention, and for good reason. It’s a huge cost, at roughly 17% of revenues across the globe. Yet spending on the workforce is nearly as much as capex. In 2021, telco capex was $326 billion (B), while labor costs totaled $273B. Some telcos spend significantly more on labor costs than capex. Saudi Telecom (stc), for instance, spent $2.6B on labor costs in 2021, 60% more than that year’s $1.6B capex figure for the company. The labor cost to capex ratio exceeded 1 for a number of other large telcos in 2021, including: Chunghwa (1.26), Orange (1.10), Singtel (1.2), Telecom Argentina (1.20), Telefonica (1.23), and Telstra (1.26).

Labor costs are not just salaries. When we say “labor costs”, we mean to capture the fully-loaded cost of an employee. That includes salaries and wages, short-term benefits, retirement benefits, any required government contributions, and share-based compensation. Labor costs are around 20-60% more than just direct salaries, depending on the company. Some companies report the breakout of the various categories, but many do not. For Verizon and AT&T, we estimate the labor cost to salary ratio as 1.4.

Headcount is falling. As MTN Consulting detailed in its 4Q21 market review for the telco sector, headcount in the telco industry continued to fall last year. Total employees dropped 2% in 2021, to 4.69 million. Only 5 of the top 20 telcos increased headcount in 2021. The 2021 decline follows a much worse 3.7% drop for the industry in 2020, when COVID forced cutbacks, office closures and acceleration of timelines for digital transformation and automation programs. Prior to COVID, telcos were already in staff-cutting mode, but COVID sped up the process. Looking down the road a bit, telco headcount should fall to ~4.4M by 2026. Figure 1 illustrates changes in 2021 for the top 20 telco employers.

Figure 1: Total employees and YoY % change of top 20 telcos, 2021

Source: MTN Consulting

Labor cost per employee is rising. Amidst this drop in headcount, average labor costs have been rising. From $49.2K in 2017, the average telco employee in 2021 cost $57.6K, or 17% more. Prior to 2018, labor costs per employee were flat for most of the last decade, hovering around US$50K per employee. The inflationary pressures of late 2021 may have played a small role, but more important is the changing nature of a telco. With deployment of software-based platforms in the network, and digitization of a whole range of processes across the company, a different type of employee is required. Some may be younger, but their skills are in demand and can be costly. There is rising competition for these employee types, including from cloud providers like GCP and AWS.

Labor costs a large part of opex. The rising cost per employee is interesting, but even more important may be labor cost’s contribution to opex. As a percentage of opex, excluding the non-cash items of depreciation & amortization, labor costs can exceed 30%. That was the case for a number of large telcos in 2021, including BCE (labor costs equal to 32.6% of opex ex-D&A), BT (31.7%), KPN (30.8%), Swisscom (39.8%), and Telecom Italia (35.9%). Some of these companies face constraints in how they structure their workforce, for instance, union rules limiting layoffs or locking in salary increases. On average, labor costs account for about 22% of opex ex-D&A.

The labor cost burden isn’t equal across markets. Telcos across the globe face similar price levels for their technology inputs. Prices vary somewhat, of course, but the variation is rarely on the order of 3-5x. More important is the variation in technology choices made across different markets, and the way they finance capex. For labor costs, though, the variation in the cost of an employee can be huge. Labor markets are highly localized, even with a more remote/hybrid workforce than in the past. The average employee at UAE-based Du, for instance, cost US$199.8K in 2021, nearly 6x that of another UAE-based telco, Etisalat ($34.0K). The reason for that is most of Etisalat’s workforce is in lower cost countries such as Pakistan, Egypt, and Morocco, whereas Du operates solely out of high-cost UAE.

Telcos investing in upskilling. As telcos deploy more software in their networks and digitally transform all aspects of their operations (including sales & customer support), many are investing heavily in upskilling their employee base. Vodafone, for instance, says “the transformation into a new generation connectivity and digital services provider requires new skills and capabilities in our organization, such as software engineering, automation and data analysis.” Vodafone invested an average of 470 Euros in FY2021 on “training each employee to build future capabilities.” Similar things are occurring at many other telcos, including Deutsche Telekom, which is investing in “upskilling and reskilling programs with a focus on digital skills”. There is also a growing focus on hiring younger employees with skills more appropriate to the digital age.

Propensity to adopt automation varies widely. Vendors talk a lot about how their solutions allow customers to do more with less: automate tasks and processes which previously required manual intervention. This has always been a part of the telecom industry, from the days when telcos migrated away from manual telephone switchboards. It continues to be important as telcos aim to lower their cost of operations, deploy services more rapidly, and maintain network quality. The importance of automation varies widely across country and operator, however. Companies which face high unit labor costs tend to be more eager to adopt automation, all else equal. When labor costs are a relatively high portion of overall opex, that eagerness multiplies. Figure 2 below illustrates the issue.

Figure 2: Labor cost burden variation across 30 large telcos, 2021

Source: MTN Consulting
Notes: Size of bubble is indicator of relative revenues. Red star icon represents the global average.

For 30 large telcos, the above figure shows labor cost as a % of opex (ex-D&A) on the x-axis, and labor cost per employee on the y-axis. The companies in the top right quadrant tend to be more open to automation, while the bottom left (low labor costs) are the opposite. Swisscom is a bit of an outlier, as its labor costs are so high. That’s a reason for Swisscom’s adoption of Red Hat’s Ansible Automation Platform in 2018, for instance. Other big telcos with an economic inclination to automate include: Telefonica, DT, Telstra, NTT, Orange, BT, BCE, and Telecom Italia.

One thing that telcos won’t be automating anytime soon is the CEO. The top few managers in many leading telcos continue to earn millions of US$ per year, and there often seems to be little relationship between these sky-high pay packages and the company’s performance. Light Reading detailed this situation recently in an insightful article. LR notes that the ratio of CEOs’ pay packages with the median employee in 2021 was 312:1 for T-Mobile, 231:1 for AT&T, 166:1 for Verizon, and 106:1 for Telefonica. Swisscom’s CEO Urs Schaeppi had to make do with a relatively paltry margin of 14:1.

Cover image credit: Scott Webb on Unsplash

Cisco, Samsung, and ZTE benefit most from Huawei bans in 2021 telco NI market

Posted on 29/03/2022 | 21/04/2023 by Matt Walker

2021 results for the 100+ vendors selling into the telco market are just about finalized. Contrasting 2021 “telco network infrastructure” (Telco NI) share with 2020, Cisco clearly came out on top, gaining 0.7% share in a market worth $231.4 billion (B). Cisco was helped both by a telco shift in 5G spending towards core networks, and Huawei’s entity list troubles. Samsung’s share growth of 0.3% was due to a big win with Verizon and a growing telco interest in seeking RAN alternatives beyond Ericsson and Nokia. ZTE, which has escaped the US entity list to date, also picked up some unexpected 5G wins but its growth is more broad-based due to optical, fixed broadband, and emerging market 4G business.

Dell (including VMWare), Microsoft, and Amazon also picked up share as telcos have begun investing in 5G core and cloud technologies. Their growth has little to do with Huawei, and more due to telcos’ ongoing changes to network architecture and service deployment patterns. Corning was an unexpected winner in 2021, gaining 0.2% share on the back of fiber-rich wireless deployments and government support for rural fiber builds.

On the flip side, both Nokia and Ericsson lost share in the overall telco NI market in 2021. Their RAN revenues benefited from Huawei’s troubles in 2020 but telco spending has since shifted towards product areas with more non-Huawei competition. Both vendors are attempting to diversify beyond the telco market, with Nokia so far having more success; its non-telco revenues grew 12% in 2021.

Huawei’s share of telco NI declined to 18.9% in 2021, down from a bit over 20% in both 2019 and 2020. The US Commerce Department’s entity list restrictions were issued in May 2019 but hit the hardest in late 2020 and 2021, after Huawei’s inventory stockpiles began running out.

Huawei’s messaging on its recent fall is muddled. During its annual report webcast yesterday, it cited three factors behind its 2021 revenue decline: supply continuity challenges, a drop in Chinese 5G construction, and COVID. In MTN Consulting’s opinion, supply continuity was the main factor. A related factor were the many government-imposed restrictions on using Huawei gear around the world, especially in Europe where 5G spending was strong in 2021. The other two factors cited by Huawei’s CFO, however, are misleading. Chinese telco network spending, overall, was relatively strong in 2021: total capex for the big three telcos was $52.8B, up 8% from 2020. Without this rise, Huawei’s 2021 results would have been worse. As for COVID, few other vendors cite the pandemic as a factor restraining 2021 telco spend. More vendors cite the opposite: 2021 spending was strong in part because telcos were forced to delay many projects during COVID’s early spread.

To date, Huawei’s troubles have impacted RAN markets the most, but in 2022 and 2023 will begin spreading more clearly to IP infrastructure, optical, microwave, fixed broadband, and other areas. A number of vendors are eager to pursue new opportunities as this happens, including Adtran/ADVA, Ciena, Cisco, CommScope, DZS, and Infinera. The CEO of Infinera, in fact, said on its 4Q21 earnings call that “it was a nice taste, a nice appetizer in 2021, but…we said all along that we would see the design wins and RFPs really scaling and we thought that we’d see revenues from that really beginning to take hold as we got into 2023.”

To date, Huawei has been unable to fully adapt to the supply chain restrictions put in place in 2019. It remains the global #1 in telco NI, however, due to dominance in China and a huge installed base across the globe. The company is investing heavily in carrier services & software, Huawei Cloud and new product areas. One certainty is that it won’t simply fade away, despite the current decline.

Telco NI vendor market in 2Q21 – preliminary findings

Posted on 11/08/2021 | 19/07/2022 by Matt Walker

Growth returns to telco NI market; momentum shifts to cloud, away from Huawei

Preliminary results show 2% YoY sales growth in 2Q21

Enough vendors have now reported their 2Q21 results to allow for some preliminary conclusions about the market. As of August 10, we have compiled earnings figures and analyzed customer segmentation for 72 vendors, including Huawei. These 72 account for roughly 3/4 of the market based on historic revenue trends.

Focusing on vendors’ sales to the telco vertical, what MTNC refers to as “telco network infrastructure” or telco NI, revenues climbed 2% YoY in 2Q21.

That’s slower than the 8.7% YoY growth rate recorded by this subset of vendors in 1Q21. However, the 1Q21 surge was influenced by a weak base period (1Q20), when economies were dragged down by COVID’s early spread. On a six month basis, telco NI revenues in 1H21 grew 5.1% YoY. Annualized (12 month) telco NI revenues through 2Q21 grew 2.8% over the 2Q20 figure. These growth rates may be modest in other parts of the tech sector, but for telco NI they are an improvement.

As Figure 1 shows, Huawei has tracked very differently from the overall market: outperforming in 1H20 due to Chinese 5G spending, and lagging in the last two quarters as supply chain restrictions and security concerns caught up to the company.

Figure 1: YoY change in annualized sales to telcos: Huawei vs. all others (preliminary)

Source: MTN Consulting
*Data for “all others” represents the sum of 71 vendors already reporting 2Q21 earnings, including historical data for acquired companies (e.g. Amdocs-Openet)

This growth is welcome news for the many vendors with strong positions in the telco sector. Moreover, the growth comes despite Huawei’s 7% decline in first half telco NI revenues. As the market’s (still) largest vendor, this 7% drop has a big impact on the overall market. Removing Huawei’s figures from our calculations, for 2Q21 alone preliminary telco NI vendor revenues grew by 11% on a YoY basis.

Among reporting vendors, the best 2Q21 results in terms of YoY change in telco NI revenues (on a USD basis) came from Ericsson, Nokia, Samsung, Microsoft and Capgemini. Ericsson and Nokia are benefiting from uptake of 5G worldwide and picking up some of Huawei’s old business. Samsung’s improvement is due both to its Verizon 5G deal and to making strides in smaller 5G markets like Canada and New Zealand. Microsoft’s result is due to a long list of telco collaborations, as well as two 2020 acquisitions (Affirmed and Metaswitch). Capgemini’s growth is due largely to acquiring Altran, an engineering services business with strong telco roots. As far as YoY drops in telco NI revenues in 2Q21, the only significant one among companies reporting to date is Huawei: we estimate its 2Q21 revenues at $12.2B, down from $14.4B in 2Q20.

Moving back to a more long-term comparison, Figure 2 illustrates the biggest swings in annualized telco NI revenues for 2Q21 (versus 2Q20 annualized).

Figure 2: Biggest swings in annualized telco NI revenues, 2Q21 vs. 2Q20

Source: MTN Consulting

As Figure 2 makes clear, Microsoft (shown as “Azure”) is not the only cloud provider making progress in the telco sector. AWS also recorded an impressive bump in annualized telco NI revenues in 2Q21, just a bit behind Microsoft. GCP is not in the top 10 but its 2Q21 annualized telco NI revenues measured $129M, double the 3Q19-2Q20 figure. Combined, the three companies accounted for approximately $1.9B in annualized sales to telcos in 2Q21, from $970M a year earlier. That puts the three companies’ collective telco NI market share a bit ahead of Juniper Networks. Increasingly these webscale-based cloud providers are competing against vendors with a much longer track record in the telco industry: Amdocs, Cisco, Nokia, etc. AT&T’s recent deal with Microsoft will accelerate this competition as it entices more telcos to consider outsourcing and collaborating with the cloud.

Huawei’s changing fortunes opening up opportunities

The Huawei dip in 1H21 is not unexpected. We wrote earlier this year that Chinese telco NI vendors would likely lose $4B of revenues in 2021 due to supply chain restrictions and security concerns. What we predicted is largely coming true:

“US policy will continue to restrict much of the Chinese technology sector’s access to US supply chains; the US government will aim to minimize deployment of Chinese technology in both US communications networks and those in allied countries; and, US policy will support alternative technologies and companies that can help smooth the transition away from China. Implications: Huawei will see market share in the telecom sector decline markedly over the next 2 years; China will push harder on its own allies to purchase Huawei/ZTE gear; Huawei and ZTE will emphasize services and software more, and hardware less; China will explore many ways around the rules but see limited success without crucial chipmaking technology; Open RAN will see an accelerated adoption curve; US companies like Ciena, Cisco, and Infinera, and others (e.g. Fujitsu and NEC), will see telecom opportunities pick up significantly in 2H21 and 2022.”

In recent earnings reports and calls, many vendors are pointing to the recent Huawei weakness as one driver for improved results; for instance:

ADVA: “With some of the Chinese competitors being limited in Europe due to security relevant issues, we see additional growth potential here.”
Dasan Zhone: cites “numerous Huawei and ZTE replacement opportunities”
Infinera: “On the competitive side, we see significant competitive disruption with the situation in Huawei being removed from the European and Asia operator
networks over the course of the next 2 years to 5 years type time frame”
Ribbon: “Competing in large addressable markets such as optical and IP networking…there are opportunities for significant share growth and a favorable competitive environment with the global pressure on Huawei and other Chinese suppliers.”
Nokia: “there are cases…where operators for various, sometimes politically-driven
reasons, have decided to … switch suppliers. And we have already estimated and I can confirm that, that we have won approximately 50% of such opportunities.”

As Nokia’s discrete wording suggests, discussing Huawei publicly can still be tricky for top execs. Many of these companies rely on China for various parts of their supply chain, or as an end use market. Ericsson’s decision to go after Chinese business more aggressively than Nokia has put it in a tough spot. Chinese officials are explicitly linking Sweden’s ban on Huawei in 5G with Chinese telco procurement decisions. This is a good reminder that China’s telcos are not private entities, and that Huawei’s fate is extremely important to Chinese politicians.

Final results available in September

As noted, this short note is based upon roughly 75% of the market reporting. A number of significant vendors have not yet published 2Q21 earnings. The largest of these, by far, are Cisco and ZTE. We will publish final results and commentary on the 2Q21 telco NI market in September.

Connected cars: OEM car maker strategies – where does the network operator fit in?

Posted on 03/08/2021 | 19/07/2022 by Arun

Connected Car Emerging Tech Series Part 3

Author: Waseem Haider

Today’s car industry is not the same as it used to be, thanks to technology. OEMs are not only manufacturing cars but also developing software solutions for a more connected, personalized customer experience. The ever-evolving auto industry provides opportunities to OEMs to advent new revenue streams and to have more direct, ongoing relationships with their consumers. The changing landscape comes with its share of challenges for OEMs as they need to now focus on products and services outside of their core activities and try to improve profitability by selling connectivity as part of their overall offering.

OEMs are developing different strategies to reap the full benefit of the connected car opportunity. Some OEMs are working on their own ecosystem while others are developing partnerships with specialist vendors. The expanded connected car ecosystem plays a significant role in catering to the consumer demand of today and in the future. Among the different stakeholders in the ecosystem, the role of network operators – both telcos and webscalers – cannot be ignored. In this third part of the connected car tech series, we will talk about the strategies of OEM car manufacturers in the connected car space, and the role played by network operators.

OEM connected car strategies

As with any other industry, the digital transformation of the automotive industry poses a great challenge to OEMs. The digital world has pushed car manufacturers to become software companies selling a personalized customer experience to meet changing consumer demands. Future car buyers will not make it easy for OEMs as the world will move to autonomous vehicles with some drastic changes in consumers’ willingness to own a car. OEMs are aware of these challenges, and are implementing different strategies to keep their dominance in the connected car space despite competition from big tech companies.

In this section, let’s dive into some of the OEMs connected car strategies.

From the premium car manufacturers like BMW, Porsche, Audi, Mercedes etc. to the volume brands like Ford, Opel, Volvo etc., strategies differ based on relative dominance of the OEM, customer engagement, in-house capabilities, innovation, and investment in R&D. To simplify, let us group the OEM strategies in the connected car space into three main approaches:

Developing In-house Capabilities
Partnership/Building an Ecosystem
Working with Global Industry Standards

1 – Developing In-house Capabilities

Big tech companies like Google, Facebook, and Amazon are at the forefront of connected car technology, putting Automotive OEMs in a difficult situation. As the expertise required for connected cars goes beyond the core business of OEMs, they are facing a big challenge to keep a dominant position in the ever-expanding ecosystem. Some of the OEMs are taking on these tech players directly by building in-house assets and capabilities for connected cars. One of most prominent OEMs who is realigning its strategy from car manufacturer to a software-driven mobility provider is Volkswagen.

Case Study: Volkswagen Connected Car Strategy

Volkswagen is reinventing itself into a digital mobility provider by investing heavily into several areas: software development, autonomous driving capabilities, electric vehicles’ battery technologies and other mobility services. With the new Group strategy “NEW AUTO – Mobility for Generations to Come”, the Volkswagen Group is realigning from a vehicle manufacturer to a leading, global software-driven mobility provider.

Volkswagen’s Car.Software group is central to this realignment (figure 1, below). The automotive giant is building its own end-to-end software platform with an in-car operating system (VW.OS), and capabilities aimed to enable the next generation of infotainment, vehicle performance, and passenger comfort as well as automated driving.

Figure 1: Volkswagen’s Car.Software organization

Fig 1, VW car software

Source: Volkswagen

In addition, Volkswagen has announced a strategic partnership with Cubic Telecom and Microsoft to develop the Microsoft Connected Vehicle Platform (MCVP).

Together with Microsoft, VW hopes to accelerate the development of one of the largest dedicated automotive industry clouds, known as Volkswagen Automotive Cloud or VW.AC. Designed to provide a smart, scalable foundation for connected vehicles, VW.AC is expected to handle data from millions of vehicles per day, with the goal of delivering connected experiences to customers around the globe starting in 2022 – a key part of the Volkswagen Group strategy to become a leading automotive software innovator.

Volkswagen Group writes less than 10 percent of the software embedded in its vehicles, the rest of which is tied to third party-owned proprietary software. With efforts like the Car.Software Organisation and VW.AC, the Volkswagen Group aims to write 60 percent of the vehicle software by 2025, providing a truly integrated end-to-end software.

Where does the network operator fit in?

While Volkswagen is focused on in-house capabilities, its work with Microsoft makes clear that this strategy still involves network operators. Microsoft is one of the world’s largest “webscale network operators”, a tech company investing heavily in its own data centers, subsea cables, and related cloud infrastructure. It is possible that other types of operators may play a role in Volkswagen’s strategy over time, including telcos. Apart from providing connectivity, the operator is strongly positioned to offer cloud services, software and hardware solutions to supplement the OEM’s connected car in-house capabilities.

2 – Partnership/Building an Ecosystem

Some automotive OEMs are partnering with other OEMs by building global alliances to develop digital technologies for connected cars and future mobility services. One such global partnership is “The Alliance,” involving three OEM groups – Groupe Renault, Nissan Motor Company and Mitsubishi Motors Corporation – working together on future mobility technologies and solutions.

Where does the network operator fit in?

With this approach, three big OEMs are working with each other to develop connected car technologies and solutions. Telcos can be helpful partners in such alliances to provide technology software and solutions. As an example, the Renault-Nissan-Mitsubishi alliance is working together with Orange in the field of electric vehicles (EVs). Microsoft also plays a role in The Alliance, as discussed below.

Case Study: Renault-Nissan-Mitsubishi connected car strategy

The Alliance connected vehicle team is developing the Alliance Intelligent Cloud. Microsoft supports the Connected Vehicles Platform component of the Alliance Intelligent Cloud (figure 2, below). The Connected Vehicles Platform manages Alliance connectivity across all markets.

Figure 2: The Alliance Intelligent Cloud

Fig 2, the Alliance Intelligent Cloud

Source: Microsoft

Microsoft is not the only Alliance partner. In September 2018, the Alliance signed a global multiyear agreement to partner with Google to equip Renault, Nissan, and Mitsubishi Motors vehicles with intelligent infotainment systems. The Alliance will utilize Android to offer customers a new array of services including Google Maps, the Google Assistant, and the Google Play Store.

These services will be combined with Alliance Intelligent Cloud-based remote software upgrades and vehicle diagnostics. By combining the latest technologies from the Alliance and Google, the Alliance member companies’ vehicles aim to have the most intelligent infotainment system in the market. Drivers and passengers can leverage Android capabilities to access an ecosystem that includes several existing applications and an expanding array of new apps. Per Microsoft, vehicles utilizing the Alliance Intelligent Cloud “will benefit from seamless access to the internet, providing enhanced remote diagnostics, continuous software deployment, firmware updates and access to infotainment services.”

The Alliance Intelligent Cloud is designed to leverage the combined scale of the three partners and Azure’s vast footprint. The Alliance cloud aims to consolidate multiple legacy connected vehicle solutions with future connected car features and business operations, and support mobility services. Features built into the connected platform include remote services, proactive monitoring, connected navigation, connected assistance, over-the-air software updates and other customer tailored services. As noted, The Alliance does leverage Google’s Android app ecosystem, but relies heavily on Microsoft for the cloud. The goal is for this partnership of OEMs to own, operate, and design their own intelligent cloud platform on Azure.

The Alliance Intelligent Cloud also aims to connect Alliance vehicles with future smart cities infrastructure, simplifying negotiations and technical development by providing a single point of contact.

3 – Influencing Global Industry Standards

Automotive OEMs are not anymore only manufacturing cars but are also new-age software companies which need to comply with standards. The challenge, though, is for OEMs there are hardly any global industry standards for connected cars. This lack of standards also creates an opportunity; those who write the standards often have a strong position in the market to follow. One strategy is ensuring you have a seat at the table when the standards are drafted.

To address the standards issue, OEMs together with other automotive vendors formed a non-profit alliance in 2009 – GENIVI. The alliance develops standard approaches for integrating operating systems and middleware present in the centralized and connected vehicle cockpit. The GENIVI platform consists of Linux-based core services (kernel, libraries), middleware and an open user interface. The goal is for this platform to form the basis upon which automobile manufacturers and their suppliers can establish a wide variety of products and services.

Notably, the alliance currently has no participation from the network operator side. The only exception is that Github has long been a member, and Github was acquired by Microsoft in 2018. Going forward, telcos and webscalers aiming to play a key role in the connected car market may need to participate in GENIVI.

Conclusion

Regardless of which connected car strategy is adopted, the common thread is that OEMs do not want to give away their dominant position to big tech players or new entrants. The three approaches discussed above should not be seen as exclusive. There are opportunities to combine one or more approaches with other innovative strategies. Network operators from both the telco and webscale/cloud world have opportunities to collaborate with OEMs, offering complementary solutions such as cloud services, software and hardware solutions along with the core asset of an operator, network connectivity.

Image source: Baidu

Connected cars: Telco strategies and growth opportunity

Posted on 15/07/2021 | 19/07/2022 by Arun

Connected Car Emerging Tech Series Part 2

Author: Waseem Haider

In the first part of this series we outlined the role of telcos in the connected car ecosystem. Historically, telcos are well experienced in adding value to adjacent verticals based primarily on their core assets. Some of the verticals where telcos have already made a mark are Smart Home, Utilities/Smart Energy, Finance, Retail and Public sector, to name a few. Telcos are now making their mark in connected cars.

Telco connected car strategies

Connectivity is the cornerstone of any connected car and telcos have a competitive advantage in providing safe and reliable connectivity. However, with the ever-expanding connected car ecosystem, it is not only connectivity which telcos bring to the table but also other capabilities. In this write-up we will have a look at what different strategies telcos are implementing in the growing connected car market.

Core strategy: connectivity

As part of telcos’ strategies in the connected car space, Figure 1 provides an overview of connectivity categories.

Figure 1: Automobile connectivity categories

cc part 2 fig1

Source: McKinsey & Company

Connectivity is a vital part of the technology stack seen in connected cars being manufactured by OEMs. Some of these cars are capable of exchanging data and information not only in-vehicle but also with the external environment (see Figure 1, above). V2X (vehicle-to-everything) encompasses all the related terms – communication with other vehicles (V2V), networks (V2N), infrastructure (V2I) and pedestrians (V2P). Most of the OEMs already allow car owners to connect, monitor and interact with their vehicles. As we move towards autonomous vehicles in future, cars will rely on connectivity to communicate with one another and the external environment. Broadly, connectivity for any connected car falls into two major types:

Cellular & Satellite (Network based communication)
Wireless point-to-point (Direct communication)

Network-based Communication is long-range, also known as V2N (vehicle-to-network) communication, where V2N employs telcos’ commercially licensed spectrum. Connected cars also have access to cloud services and other security offerings of telecom networks.

Direct Communication involves short-range wireless communication between nearby vehicles (V2V), infrastructure (V2I) such as traffic lights, and pedestrians (V2P) where vehicles communicate directly with the device carried by pedestrians. In some specific scenarios such as non-line-of-sight (NLOS) objects, cellular network-assisted direct communication is of relevance.

Regardless of the type of communication, telcos are playing a significant role in providing connectivity to today’s connected cars today, and will do so in the future when autonomous cars will be commonplace. The telcos are working with a mix of complementary technologies to enable reliable and safe connectivity to connected cars like 4G/LTE, Satellite, DSRC (dedicated short-range communication) and 5G for autonomous vehicles with low latency and more reliable communication compared to existing technologies.

Adjacent strategy: VAS (value-added services)

Apart from providing reliable and safe connectivity for the connected cars ecosystem, telcos have an edge in deploying integrated solutions which leverage their experience working with multiple partners. Telcos are uniquely positioned to manage value-added services (VAS), collaborating across consumers and OEMs. There is no “one-size fits all” strategy and strategies can vary across telecom operators, depending upon which area of the connected car value chain they are focusing on and where they want to compete.

As customer expectations are increasingly high and technology is much more advanced, telcos can be at the forefront of new emerging use cases in the connected car space. Some of the most popular value-added services which are part of telcos’ offerings are:

Cloud-based integrated platform
Customized billing solutions
Telematics and big data analytics platform
Other VAS

Some of the specific examples of value-added services provided by Telcos in the connected car space are:

Lost/stolen vehicle recovery end-to-end service
Usage-based insurance
Vehicle location monitoring
Pay-per-use billing for in-vehicle services
Cross-device identity management
Fleet management services
Data management across IoT sensors
Vehicle/Infrastructure data integration services
Vehicle and device security solutions

Future strategy: end-to-end mobility services

The future of mobility is more connected, intelligent, shared, and autonomous, which creates a plethora of opportunities for telcos. One of the biggest opportunities coming out of the shifting mobility landscape is the leveraging of all the data generated by vehicles. For example: the in-vehicle infotainment data could be analyzed by telcos to track consumer usage to advise content producers, advertisers, and media houses on consumption patterns, and can be monetized by telcos, leveraging consumer data insights. Another example is fleet management services including tracking, dispatching, and scheduling fleets. Telcos can make use of customer profile data and other authentication details to manage vehicle access on behalf of fleet operators.

However, any opportunity emerging from data monetization in the connected car space is surrounded with challenges. Some of these challenges are – who owns the data? Are consumers willing to pay for data services and/or provide consent to use their personal data? Are automotive OEMs ready to share the pie with telcos and other ecosystem players? What measures are telcos undertaking for data protection and security? Telcos can overcome some of these challenges based on their history of managing sensitive customer data while ensuring personal data protection. This gives the telco an edge to provide data-based products and services, including targeted advertising, pay-as-you-go infotainment, Mobility-as-a-service (MaaS), consumer health monitoring including user-based insurance etc.

Additionally, with the roll-out of autonomous vehicles and 5G, telcos will continue to work on more innovative products and services, to bring a differentiated offering to end-users and other ecosystem partners. The future role of telcos in the a connected car space will be providing broader mobility solution, going beyond connectivity and value-added-services.

Figure 2 below illustrates how telco strategies in connected cars may evolve, from point solutions to transformational, end-to-end mobility experiences.

Figure 2: Telco strategy evolution in connected car market

cc part 2 fig2

Source: Deloitte

Case Study: AT&T

AT&T has a dedicated connected car platform called “AT&T Drive”. This is a modular platform which allows auto OEMs to choose from a range of services, from connectivity to revenue management solutions. AT&T is working with various stakeholders – automakers, developers, and other suppliers – to design customized solutions to bring new services to connected cars. Some of the services provided by AT&T in concert with other solution providers in the connected cars ecosystem are:

Amdocs: Customized Billing solution

Ericsson: Global Application delivery platform

Accenture: Telematics and Big Data Analytics

Jasper Wireless: Global cloud-based connected device platform

Figure 3 illustrates AT&T’s current proposition in the connected car market.

Figure 3: AT&T’s Connected Car Positioning

cc part 2, fig3

Source: AT&T

Conclusion

MTN Consulting believes that telcos have real revenue upside opportunities in the connected car space. However, for that to become a reality, there is a need for telcos to think out-of-the-box in terms of future strategies. Telcos should aggressively build capabilities which they do not own traditionally, even if that means new partnerships and alliances to develop service portfolios around the connected car landscape. For instance, they could partner with augmented-reality providers to demonstrate the ability to deliver enhanced multimedia content experiences within the vehicle, and they could partner with fleet management service providers to provide intermodal mobility device tracking, monitoring, and interoperability.

Image Source: Toyota

Tag: Telcos

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