Telecom’s biggest vendors – 1Q21 edition

After struggling for the first three quarters of 2020, the telecom network infrastructure (telco NI) market has surged in the last two quarters. That is due to recovery from the worst of COVID-19, ongoing 5G infrastructure upgrades (now stretching to core networks), and increased adoption of cloud by the telco sector. For the 12 months ended March 2021, telco NI vendor revenues totaled $222.5 billion, up 2.5% from the 1Q20 annualized period. For the single quarter of 1Q21, sales totaled $53.1 billion, up 10.5% YoY. These positive growth rates are promising for the vendor sector, and vendors’ growth guidance for 2021 is relatively strong. In addition to market fundamentals, some of the measured growth in 1Q21 is due to depreciation of the US dollar. For instance, the Chinese RMB appreciated by 7.1% versus the USD between 1Q20 and 1Q21. If growth is measured on a fixed-exchange rate basis (i.e. constant currency), the 1Q21 YoY change in telco NI sales would have been 4.5%. That’s far lower than 10.5% but still a big improvement from a few quarters ago.

The market share leaders in the global telco NI market remain Huawei, Ericsson, Nokia, and ZTE, who were also the top providers of 5G infrastructure. Notably, Nokia has been making significant strides in the 5G sphere to counter Huawei and Ericsson. It recently partnered with cloud players Google, Microsoft, and Amazon for developing 5G solutions. Nokia also plans to trim its headcount, about 10,000 by 2023, to save costs and invest more in R&D to further its 5G ambitions. China Comservice and Cisco took the fifth and sixth spots overall. Collectively the top 6 accounted for 55.5% of the market. This telco NI market share study includes a wide range of vendor types and cuts across hardware, software, and services. If you consider only hardware & software revenues from one specific category of vendors, network equipment providers (NEPs), total revenues were $123.4 billion for the 1Q21 annualized period. The top ten providers for this market are Huawei, Nokia, Ericsson, ZTE, Cisco, Intel, NEC, Fiberhome, Samsung, and Fujitsu. This category (NEP hardware & software) most directly maps into what is sometimes reported as the “telecom equipment” market.

Changes in coverage

This edition of MTN Consulting’s “Telecom’s Biggest Vendors” series adds four suppliers: Airspan, Alphabet (GCP), Amazon (AWS), and Microsoft (Azure). Airspan is an important supplier in the open RAN market, and claims customer relationships in over 100 countries. AWS, Azure, and GCP are cloud services providers who have taken on an increasingly important role in the telecom sector, supporting telcos with core network functions, providing digital transformation services, and collaborating on service development and delivery. In addition, Huawei’s weakening in recent quarters has left an opening for cloud service providers to emerge as more important technology partners to telcos.

Telco capex grew 5% YoY in 1Q21, opex up by 7%

Telco NI vendor revenues are fed by a mix of telco capex and opex budgets. In 1Q21, global telecom operator capex grew 4.7% on a YoY basis. Opex, excluding depreciation & amortization, increased by 7.1% in 1Q21 on a YoY basis. On an annualized basis, capex declined in 1Q21 versus 1Q20, while opex (ex-D&A) was flat YoY. There is evidence that more of telcos’ opex budgets are being directed towards external suppliers including cloud providers selling software licenses and services.

Within the overall telco opex budget, telcos are having success in cutting their sales & marketing and G&A spending, as telcos adjusted to working from home and accelerated the migration of sales & support to digital platforms. Automation is a key area of investment in 2021 for nearly all major telcos. Numerous telcos are reporting that network operations is taking up a larger portion of the opex pie. This is important because vendors are increasingly selling into opex budgets within their telco customers, not just capex budgets. That’s especially true on the services and software sides. Webscale providers’ sales of software licenses to telcos are growing, and starting to bump up competitively against the more traditional telco-centric vendors like Amdocs and CSG.
 
Winners and losers

The biggest share winners in 1Q21, on an annualized basis relative to 1Q20, were Ericsson, ZTE, Dell Technologies (VMWare), Fujitsu, and Intel. Ericsson’s sales have been lifted by 5G infrastructure builds and Huawei’s supply chain and political problems. ZTE also benefits from 5G, and has not faced the same supply chain embargo as has Huawei. Dell has grown on the back of its VMWare unit’s efforts to help telcos virtualize networks and move to the cloud. Fujitsu’s growth is due both to Japanese 5G builds and overseas open RAN activities. Intel’s improvement is due to its multi-year efforts to penetrate the telco sector, both in the data center and the mobile RAN.

The biggest share losers in 1Q21 were Nokia, Samsung, CommScope, Huawei, and Ciena. Huawei’s loss is inevitable and will almost certainly continue through 2021. The others, though, have lost share more due to the buying cycles of major customers and all appear poised for a rebound in 2021. Samsung’s mobile RAN sales will likely pick up with Verizon and Jio sales. CommScope should benefit from government fiber deployment programs in both the US and UK. Nokia will benefit from recent cloud partnerships, plus a late June portfolio enhancement and the ongoing emergence of open RAN opportunities (where it is positioned more credibly than Ericsson). Ciena has a large number of telco customers who expect to reinforce their transport and IP core networks in 2021-22 after the initial splurge of capex on 5G RAN upgrades.

In terms of YoY growth in annualized telco NI revenues, the top 5 were Azure, GCP, Capgemini, AWS, and Ribbon Communications. The surges at Capgemini and Ribbon are due to their acquisitions of Altran and ECI Telecom, respectively. Azure, GCP, and AWS are finally seeing their years of investment in telco-centric solutions pay off.

Webscalers crash the telco party

As noted, we have just added AWS, Azure and GCP to our universe of telco NI “vendors” in the most recent quarter.

Nearly a decade ago, as cloud services began gaining popularity, many telcos hoped to be direct beneficiaries on the revenue side. The cloud market went a much different direction, though, with large internet-based providers (aka webscalers) proving to have the global scale and deep pockets able to develop the market effectively. From 2011-2020 webscale operators invested over $700 billion in capex, a big portion of it devoted to building out their cloud infrastructure. 

The cloud sector has geared its offerings to businesses of all stripes and sizes. Serving telecommunications operators was not an initial focus for many reasons. Telcos have unique network requirements and stringent reliability criteria, and tend to make purchasing decisions slowly. Many telcos also viewed cloud providers with trepidation, as potential competitors on the enterprise side. Yet the telecom market is also one of the biggest around, viewed as a prize worth fighting for. Nearly $300 billion in annual capex and $1.2 trillion in opex (excluding depreciation) are figures that are hard to ignore. Amazon Web Services (AWS) made the earliest strides in telecom, in 2015 (with Verizon), but Azure and GCP were serious about the market by 2017. Last year, Microsoft bolstered its 5G and cloud-based telecoms offerings with the big-ticket acquisitions of Affirmed Networks and Metaswitch Networks.

This telco-webscale collaboration activity has picked up in the last 12-18 months. Webscale operators help telcos with service and application development, shifting of workloads, and developing, enabling and marketing cloud-based services. Collaborations can involve delivery of a portfolio of 5G edge computing solutions that leverage the telco’s 5G network and the webscale operator’s global cloud coverage, as well as its expertise in areas like Kubernetes, AI/ML, and data analytics. Managing costs is a central purpose of telcos’ willingness to partner with webscale providers. Increasingly, the webscale operators who deliver cloud services are competing alongside traditional telco-facing vendors like Amdocs, Citrix, CSG and Nokia.

For the 4 quarters ended 1Q21, MTN Consulting estimates that AWS, Azure and GCP had aggregate revenues to the telco sector of $1.48 billion, up 78% from the 1Q20 annualized period. These cloud providers will sometimes be valuable partners for telco-focused vendors, but in many cases they will be competitors, and are important to track.

Outlook: Telco NI vendors have an opportunity for growth in 2021

In 2021, telco capex will grow in the low single digit percentage range, offsetting the decline of 2020. The software component of capex will rise slightly to just under 20%, as software-based features and network automation solutions are more widely deployed. Mobile operators’ 5G rollout plans will get back on track as more spectrum auctions complete and supply chains settle. Bandwidth growth remains strong and will benefit transmission vendors. Fiber buildouts to cell sites and small cell spots will kick up again. Telcos will need help on the services & systems integration side as they step into Open RAN architectures. They’ll also need outside help reaping the benefits of cloud collaborations with the webscale sector. Network operations opex budgets will be a more compelling opportunity for vendors, as telcos layoff more of their own staff and look for efficiencies; software licensing fees also can come from Netops budgets.

Vendors with a telco focus are used to coping with tight budgets, and helping their customers with mundane tasks like lowering their cost of operations. In 2020, COVID-19 and a slowdown in 5G deployment were disappointing to vendors, but far from catastrophic. There is hope in 2021.