Consolidation of Telecom Vendors

It looks like we might be entering a new round of consolidation of telecom vendors. Within the last year there have been the following announced consolidation among vendors:

  • Cisco is paying $5.5 billion for Broadsoft, a market leader in cloud services and software for applications like call centers.
  • ADTRAN purchased CommScope, a maker of EPON fiber equipment that is also DOCSIS compliant to work with cable networks.
  • Broadcom is paying $5.9 billion to buy Brocade Communications, a market leader in data storage devices as well as a range of telecom equipment.
  • Arris is buying Ruckus Wireless as part of a spinoff from the Brocade acquisition. Arris has a goal to be the provider of wireless equipment for the large cable TV companies.

While none of these acquisitions will cause any immediate impact on small ISPs, I’ve been seeing analysts predict that there is a lot of consolidation coming in the telecom vendor space. I think most of my clients were impacted to some degree by the last wave of vendor consolidation back around 2000. And that wave of consolidation impacted a lot of ISPs.

There are a number of reasons why the industry might be ripe for a round of mergers and acquisitions:

  • One important technology trend is the move by a lot of the largest ISPs, cable companies and wireless carriers to software defined networking. This means putting the brains to technology into centralized data centers which allows cheaper and simpler electronics at the edge. The advantages of SDN are huge for these big companies. For example, a wireless company could update the software in thousands of cell sites simultaneously instead having to make upgrades at each site. But SDN means less costly and complicated gear.
  • The biggest buyers of electronics are starting to make their own gear. For example, the operators of large data centers like Facebook are working together under the Open Compute Project to create cheap routers and switches for their data centers, which is tanking Cisco’s switch business. In another example, Comcast has designed its own settop box.
  • The big telcos have made it clear that they are going to be backing out of the copper business. In doing so they are going to drastically cut back on the purchase of gear used in the last mile network. This hurts the vendors that supply much of the electronics for the smaller telcos and ISPs.
  • I think we will be seeing an overall shift over the next few decades of more customers being served by cable TV and wireless networks. Spending on electronics in those markets will benefit few small ISPs.
  • There are not a lot of vendors left in the industry today, and so every merger means a little less competition. Just consider FTTH equipment. Fifteen years ago there was more than a dozen vendors working in this space, but over time that has cut in half.

There are a number of reasons why these trends could foretell future trouble for smaller ISPs, possibly within the next decade:

  • Smaller ISPs have always relied on bigger telcos to pave the way in developing new technology and electronics. But if the trend is towards SDN and towards large vendors designing their own gear then this will no longer be the case. Consider FTTP technology. If companies like Verizon and AT&T shift towards software defined networking and electronics developed through collaboration there will be less development done with non-SDN technology. One might hope that the smaller companies could ride the coattails of the big telcos in an SDN environment – but as each large telco develops their own proprietary software to control SDN networks that is likely to not be practical.
  • Small ISPS also rely on larger vendors to buy enough volume of electronics to hold down prices. But as the big companies buy fewer standard electronics the rest of us use you can expect either big price increases or, worse yet, no vendors willing to serve the smaller carrier market. It’s not hard to envision smaller ISPs reduced to competing in the grey market for used and reconditioned gear – something some of my clients already do who are operating ten-year old FTTP networks.

I don’t want to sound like to voice of gloom and I expect that somebody will step into voids created by these trends. But that’s liable to mean smaller ISPs will end up relying on foreign vendors that will not come with the same kinds of prices, reliability or service the industry is used to today.

An Upgrade to G.fast

Speed_Street_SignNokia has announced the lab trial of the next generation of G.fast, the technology that can pump more bandwidth through telephone copper. They ae calling the technology XG.fast.

In a recent trial the equipment was able to send a 5 Gbps signal over copper for 100 meters and 8 Gbps for 30 meters. This is much faster than the G.fast top speed in trials of about 700 Mbps. In a real life situation using older copper the speeds will not be nearly this fast. G.fast in real life trials has gotten about half of the speeds seen in labs, and it would be impressive if that can also be achieved for XG.fast.

The technology works by utilizing higher-band frequencies on the copper. Traditional VDSL uses frequencies up to about 17 MHz. G.fast uses frequencies between 106 MHz and 212 MHz. XG.fast climbs the spectrum even further and adds on spectrum between 350 MHz and 500 MHz.

There are a lot of issues involved in using all of this frequency on a small-gauge copper. The main problem is crosstalk interference – when adjoining copper wires interfere with each other, and this degrades the signal and drastically cuts down on the distance the signal can be transmitted.

Nokia mitigates the crosstalk using vectoring, the same as is done with VDSL and other DSL technologies. Vectoring generates an –out of-phase signal that can cancel out some of the interference. But there is so much interference at thise frequencies that vectoring can only keep the signal coherent for the short distances seen the trial.

To date there has not been a lot of interest in G.fast. Adtran, the other competitor in the G.fast space claims to have now conducted ninety field trials of the technology worldwide. That’s an extraordinarily low number for a technology that can add speed to existing copper. But it looks like most phone companies are not interested in the technology, and they have some good reasons.

The short distances make G.fast and its new successor impractically expensive in the copper plant. In order to use the technology the telco would have to mount an XG.Fast transmitter at the pole outside each home, or in dense neighborhoods to perhaps serve a few homes. But if the telco wants to take advantage of the faster speeds that XG.Fast can get into the home they also would need to string fiber to feed the XG.Fast transmitters.

XG.Fast is largely a fiber-to-the-curb technology and the cost of the building fiber up and down streets is the big hurdle to using the technology. Any company willing to spend the money to build that much fiber probably isn’t willing to trust copper for the last 100 feet.

There is one application where XG.fast makes good economic sense. It can be extremely costly to rewire older apartment buildings with fiber. But every apartment building has existing telephone wiring and XG.fast can be used to move data from a telephone closet to the apartment units. This sounds to be far less costly than trying to snake fiber through older buildings. Since a lot of companies have avoided older apartment buildings this might offer a relatively inexpensive way to bring broadband.

You can’t fault Nokia for continuing to pursue the technology. There is a huge amount of copper still hanging on poles and the world keeps shouting for more broadband. But I get nervous about recommending any technology that isn’t widely accepted. I can picture a telco deploying this technology and then seeing support dropped for the product line.

But I can’t see this ever being much more than a niche technology. Telcos in the US seem to be looking for reasons to tear down copper and don’t seem willing to take one more shot at a copper technology. There might be a good business case for using the technology to extend broadband inside older buildings. But US telcos seem completely uninterested in using this in older copper networks.