Network Infrastructure: No Rising Tide to Raise All Ships

The Important

  • 50 years on, the Internet, and broadly speaking networking, are a raging success.
  • Network infrastructure growth is often driven by regional, segment, and technology refresh hotspots, leading to inconsistent aggregate growth across the entire market. This dynamic creates management / leadership challenges.
  • There are some broad-based opportunities like SD-WAN and Security.

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Discussion

Over the last couple of years, there have been various retrospectives on ARPA, DARPA, and the Internet reaching a 50-year milestone, for example:

The Internet is a raging success, and with success comes high saturation rates, lower growth, and opportunity hotspots.

Adjusting to a long term secular trend from billed-by-the-minute voice services, including previously high-margin long-distance services, to multiservice flat-rate Internet services, Communication Service Providers (CSPs) have been struggling with long-term revenue growth, which has in term put pressure on CAPEX. There have been some strong spending cycles in wireless, where there is still some billing/pricing sophistication remaining and multiple competitors in many regions drive each other to upgrade from one generation to the next. Overall though, CSPs are looking around for new ways to grow, for example wading into the streaming video market, for example, what is anticipated following AT&Ts acquisition of Time Warner / Time Warner content rights.

If we look at what is growing (source: Dell’Oro press releases):

  • Telecom Equipment, driven by RAN & Optical
  • RAN, driven by APAC 5G deployments
  • Optical, driven by Coherent, 100G(+) and Data Center Interconnect (DCI)
  • EPC & VoLTE, driven by preparation for 5G deployments
  • Core Routers driven by 100G
  • Campus switching, driven by a Cisco product refresh cycle (Cat 9K)
  • Optical access (PON ONTs) driven by growth in China/APAC
  • Network Security driven by whatever else is happening in networking, specifically at the moment hybrid cloud.
  • 400G will of course be kicking in down the road.
  • Potentially an increase in professional services to ease the transition pains to SDN/NFV and IoT.
  • And then there is SD-WAN, more on that below.

With some exceptions, the general observation is network infrastructure suppliers need to have the right product, in the right region, at the right time. That’s hardly a rising tide raises all ships industry, and it is hardly a formula for consistent, aggregate growth. Some suppliers have solutions in multiple categories and multiple geographies, but still, the bottom line is network infrastructure is driven by technology refreshes (100G, 400G, 5G, Cat9K), segment hotspots (Cloud, Cat9K campus refresh may also be driving campus WLAN refreshes), and regional hotspots.

I say above that transitions to SDN/NFV and IoT *may* drive professional services growth because we all know that professional services can be used as a competitive wedge and SDN/NFV needs to expand beyond VoLTE and EPC. Services have always been a bigger component of the wireless segment than the wireline segment, so some suppliers have always had stronger practices than others. As Huawei appears to be the supplier that analysis concludes is leading this segment, it could be argued this is a business model decision.

If we look at longer-term drivers, we see a world where more than half the world’s population is now on the Internet and while digital ad spending is growing at strong rates, the long term trend is a decreasing rate of growth. The implied consequence is that adding more subscribers / smartphones is going to be a decling growth driver.

Security continues to be a challenge, and there continues to be growth in trend-driven hotspots like hybrid cloud. And then, as I say above, there is the SD-WAN opportunity:

  • IDC: SD-WAN will grow at a 30% CAGR from 2018–2023 to $5.25B
  • Dell’Oro: SD-WAN to grow at a CAGR of 35%
  • ACG: SD-WAN to grow to $3B by 2023 at a CAGR of 40%
  • Frost & Sullivan: SD-WAN will grow at a CAGR of 49% from 2018–2023
  • IHS: SD-WAN to reach $3.3B by 2021
  • Gartner: SD-WAN Is Killing MPLS, So Prepare to Replace It Now
  • Global Market Insights: SD-WAN with grow at 58% 2019–2025 to reach $17B
  • Reportlinker: SD-WAN will grow at 33% to $41B by 2023

From the above, the general consensus is the SD-WAN opportunity is strongly up and to the right. Outliers aside, let’s say the market is growing at around 30% reaching a market size of $3-$5B by 2023. Let’s call it $4B. Maybe the best opportunity in Networking, certainly from a growth perspective.

The story around SD-WAN makes sense as well: integrated security, more control to the Enterprise, ease of management, and application performance tuning in a multicloud world (see: SEDANS, SD-WAN and The Important in Enterprise Networking).

SD-WAN may be the only broad-based networking trend today. No wonder it is getting so much attention. SD-WAN touches on so many different conversations in networking: multicloud, 5G network slicing, IoT, managed services, controller-based networking, virtual network services, Internet-based services.

Conclusion

50 years on, the Internet is an obvious runaway success, as is networking in general. With success and mass-adoption comes maturity. Many product growth opportunities have regional hotspots, segment hotspots, or are technology refresh driven. This basic dynamic creates challenges for supplier leadership teams. There are also some more broad-based opportunities like SD-WAN and Security.

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