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.

Cable Labs Analysis of 5G

Cable Labs and Arris just released an interesting paper that is the best independent look at the potential for 5G that I’ve seen. Titled ”Can a Fixed Wireless Last 100m Connection Really Compete with a Wired Connection and Will 5G Really Enable this Opportunity?”, the paper was written to inform cable companies about the potential for 5G as a direct competitor to cable network broadband. The paper was released at the recent SCTE-ISBE forum in Denver. The paper is heavily technical and is aimed at engineers who want to understand wireless performance.

As is typical with everything I’ve seen out of Cable Labs over the years the paper is not biased and takes a fair look at the issues. It’s basically an examination of how spectrum works in the real world. This is refreshing since the vast majority of materials available about 5G are sponsored by wireless vendors or the big wireless providers that have a vested interest in that market succeeding. I’ve found many of the claims about 5G to be over-exaggerated and optimistic in terms of the speeds that can be delivered and about when 5G will be commercially deployed.

The paper explores a number of different issues. It looks at wireless performance in a number of different frequency bands from 3.5 GHz through the millimeter save spectrum. It takes a fair look at interference issues, such as how foliage from different kinds of trees affects wireless performance. It considers line-of-sight versus near line-of-sight capabilities of radios.

The conclusions from the report are nearly the same ones I have been blogging about for a while:

  • Speeds on 5G can be significant, particularly with millimeter wave radios. The radios already in use today are capable of gigabit speeds.
  • The spectrums being used suffer significant interference issues. The spectrums will be hampered when being used in wooded areas or with the trees on many residential streets.
  • Coverage is also an issue since the effective delivery distance for much of the spectrum being used is relatively short. The means that transmitters need to be relatively close to customers.
  • Backhaul is a problem. Fast speeds require fiber connectivity to transmitters or else robust wireless backhaul – which suffers from the same coverage and interference issues as the connections to homes.

The paper also takes a look at the relative cost today of deploying 5G technology at today’s costs:

  • The CAPEX for a 3.5 GHz system used for wireless drops (800-meter coverage distance) costs $3,000 for the transmitter and $300 per home. These radios would be making home connections of perhaps 100 Mbps.
  • A millimeter wave transmitter costs about $22,500 with home receivers at about $650. This would only cover about a 200-meter distance.
  • In both cases the transmitter costs would be spread over the number of customers within the relatively short coverage area.
  • These numbers don’t include backhaul costs or the cost of somehow mounting the radios on poles in neighborhoods.
  • These numbers don’t add up to compelling case for 5G wireless as strong cable competitor, particularly considering the interference and other impediments.

The conclusion of the paper is that 5G will be most successful for now in niche applications. It is likely to be used most heavily in serving multi-tenant buildings in densely populated urban areas. It can be justified as a temporary solution for a broadband customer until a carrier can bring them fiber. And of course, we already know that point-to-multipoint wireless already has a big application in rural areas where there are no broadband alternatives – but that application is not 5G.

But for now, Cable Labs is telling its cable company owners that there doesn’t seem to be a viable business case for 5G as a solution for widespread deployment to residential homes in cities and suburbs where the cable companies operate.