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Hyperscalers are reimagining how networks are built, owned and operated

Hyperscaler-built networks will look very different from traditional networks

Hyperscalers are building end-to-end networks that embody all the attributes and characteristics coveted by communication service providers (CSPs) as part of their digital transformations. The most significant differences are in the software stack and the access layer, where new technologies enable hyperscalers to build dense mesh networks in unlicensed and/or shared spectrum bands and build out low Earth orbit (LEO) satellite overlays for access and backhaul. Mesh networks will likely be used to provide low-cost, wireless-fiber-like connectivity in urban and suburban environments, while satellites will primarily be leveraged to provide connectivity to rural and remote environments.

Hyperscalers are starting from scratch, completely reimagining how networks should be built and operated. Their clouds, numerous network-related experiments over the past decade, plus the raft of new network-related technologies on the road map will enable hyperscalers to build asset-light, automated networks at a fraction of the cost of traditional networks.

Hyperscaler networks will cost a fraction of traditional networks

TBR estimates hyperscaler networks cost 50% to 80% less to build than traditional networks (excludes the cost of spectrum, which would make the cost differential even more pronounced because hyperscalers will primarily leverage unlicensed and shared spectrum, which is free to use). Most of the cost savings stems from innovations, such as mesh networking, carrier aggregation, LEO satellites and integrated access-backhaul, that enable significantly less wired infrastructure to be deployed in the access layer for backhaul and last-mile connection purposes.

For example, Meta’s Terragraph mesh access point can autonomously hop signals through multiple other access points before sending the data through the nearest available backhaul conduit. In the traditional architecture, some form of backhaul would need to connect to each access point to backhaul the traffic. Mesh signals could also be backhauled through LEO satellites, further limiting the need to deploy wired infrastructure in the access layer, which is one of the most significant costs of traditional networks.

Another key area of cost savings stems from cutting out certain aspects of the traditional value chain. By open-sourcing some innovations, such as hardware designs, hyperscalers can foster a vibrant ecosystem of ODMs to manufacture white boxes to compose the physical network. The white-boxing of ICT hardware can lead to cost savings of up to 50% compared to proprietary, purpose-built appliances.

Hyperscaler disruption portends structural changes to the telecom industry through this decade

The technological and business model disruption hyperscalers are bringing into the telecom industry portends significant challenges for incumbent vendors and CSPs. TBR sees the scope of disruption becoming acute in the second half of this decade, likely prompting waves of M&A that will reshape the global landscape. CSPs will engage in M&A to stay relevant and financially sound, while incumbent vendors scramble to evolve as their primary business model (selling proprietary hardware and/or software and attached services) is increasingly marginalized and eventually becomes obsolete as hyperscaler innovations spread through the industry.

Hyperscalers do not want to become telecom operators; they want to leverage networks to obtain data and drive their other digital businesses

Hyperscalers are in the data business; providing network connectivity is a means to that end

Hyperscalers are building large-scale networks to drive forward and support their big-picture strategies, which revolve around building out their respective metaverses and supporting a wide range of new digital business models that will be enabled by new technologies such as 5G, edge computing and AI.

To that end, hyperscalers have a vested interest in ensuring the entire world is blanketed with high-speed, unencumbered, intelligent, low-cost connectivity. The economic justification to build the network is driven by the need for hyperscalers to gather and process new types of data to drive these new digital business initiatives. TBR notes that this business case is completely different from CSPs’ business case, which monetizes the network access rather than the data that comes over the network. The hyperscaler model emphasizes giving away low-cost or free connectivity and monetizing the data that comes through the network. The hyperscaler model is far more valuable than the traditional connectivity model and will likely ultimately become the predominant business model for connectivity.

CSPs sit on vast data lakes and have for many years. These data lakes contain valuable information about subscribers, endpoint devices, real-time location and tracking, and other metrics that are of critical importance for some of the digital business ideas hyperscalers want to commercialize, such as drone package delivery and autonomous vehicles. Owning more of the physical network infrastructure and the core software stack puts hyperscalers in a prime position to capture and monetize this data.

TBR notes that this strategy is already in use in the telecom industry in various places in the world. For example, Reliance Jio and Rakuten are using this strategy in India and Japan, respectively. In both cases, connectivity is given away for free or at a significantly lower cost compared to rival offers, and the data generated by the connections indirectly feeds and monetizes each company’s respective digital businesses, such as advertising, financial services and e-commerce. There is significant evidence suggesting that Alphabet, Amazon, Apple, Meta Platforms and Microsoft all have strategies that are similar but of a far greater magnitude.

Hyperscalers already own and operate the largest networks in the world; the next build-out phase is the mobile core, far edge and access domains

Over two-thirds of global internet traffic traverses hyperscaler-owned network infrastructure at some point in the data’s journey. The vast majority of that traffic travels over hyperscalers’ backbone networks, which primarily comprise optical transmission systems (submarine and terrestrial long-haul optical cables), content delivery networks, and cloud (including central, regional and metro) data centers.

The domains of the network where hyperscalers have yet to dominate at scale are the mobile core, far edge and access layers, but there is mounting evidence to suggest this is changing, thanks to technological advancement and regulatory breakthroughs (e.g., the democratization of spectrum).

TBR’s Hyperscaler Digital Ecosystem Market Landscape focuses on the five primary hyperscalers in the Western world that TBR believes will own the largest, most comprehensive end-to-end digital ecosystems in the digital era. Specifically, the five hyperscalers covered in this report are Microsoft, Alphabet, Meta Platforms, Amazon and Apple. Collectively, TBR refers to these five hyperscalers under the acronym MAMAA. TBR covers the totality of the largest hyperscalers’ businesses, with an emphasis on how they are disrupting the ICT sector. Gain access to this full report, as well as our entire Telecom research, with a 60-day free trial of TBR Insight Center™.

Demand for 5G infrastructure is becoming more robust, though commercial deployments will be delayed by supply chain headwinds in the short term

Supply-demand imbalance delays pace of 5G market development

The pandemic has prompted enterprises and governments to pull forward and broaden the scope of their digital transformations, primarily for business resiliency and cost-reduction purposes but also for tapping into new market opportunities. There is significant interest among governments and enterprises across verticals in leveraging 5G and other new technologies such as AI and edge computing, to adapt economies and societies to the new normal. Though demand for 5G infrastructure is becoming more fertile and robust, deployments are being challenged by supply chain limitations.

Though most network vendors successfully navigated supply chain headwinds in 2021 and were nearly able to fully meet demand, 2022 will be more challenging as inventories are now thinner and the shortages of chips, components and labor are impacting the telecom industry more directly. Technological complexity, standards delays and geopolitical encumbrances also threaten to slow the pace of 5G ecosystem development despite broad interest in the technology. There are two primary impacts from the supply chain breakdown: The timing of revenue recognition and cash flow for vendors is altered, and the ability of communication service providers (CSPs) to meet their build-out timelines and participate in market development is hindered.

TBR sees no easy fix to resolve the supply chain issues; rather, it will be a series of small adjustments over time that will enable the supply side to fully recover and meet demand (e.g., it takes a few years to build new chip factories). This is compounded by a demand environment that is above the historical trendline, which is driven by unprecedented government market support and greater pressure on CSPs to invest in their networks to remain competitive.

Related content:

Webinar: 2022 Predictions: Telecom

Special report: Top 3 Predictions for Telecom in 2022

Top 3 Predictions for Telecom in 2022

Telecom industry faces new challenges in the post-pandemic era

2022 will be a transition year for the telecom industry

After emerging from the COVID-19 pandemic relatively unscathed, the telecom industry is entering a new phase and faces a new set of challenges. These challenges include navigating a supply chain left in shambles due to the impact of the pandemic and, representing a separate concern, the inexorable rise and encroachment of hyperscalers in the telecom domain, which threatens to completely disrupt the status quo in the industry.​

Incumbent communication service providers (CSPs) and their vendors are navigating these issues, but there is an increased urgency to digitally transform and align with structural changes occurring in the industry, such as the pressure to work with hyperscalers on network transformation and business model co-creation in the cloud.​

2022 is poised to be a unique transition year for the telecom industry. While unprecedented government stimulus that originated in the wake of the COVID-19 outbreak continues to be pumped into the global economy, lifting all players in some way across the market landscape, CSPs and their vendors must transition to the fundamentally new network architecture, which is software-based, fully virtualized and cloud-centric. CSPs must also determine where they will play in the new value chains that are being created in the digital economy, most notably in hyperscalers’ marketplaces, and in conjunction with new players that are entering the scene in domains such as private networks and satellites.​

Meanwhile, supply chain challenges are expected to persist through 2022, with continuing semiconductor and component shortages as well as ongoing skilled labor deficiencies and shipping delays, all of which threaten to delay market development and hinder vendors’ ability to recognize revenue and pursue new growth opportunities. Inflation (potentially stagflation) and rising interest rates also pose risks, portending margin pressure and debt refinancing challenges.​

Taken together, these circumstances indicate 2022 will be an unusual year for the telecom industry. While government-induced stimulus will provide various benefits to players across the industry, giving off a sense that the industry is functioning normally and is healthy, an acceleration in competitive and technological changes poses a risk to the long-term performance of incumbents. Amid the uncertainty 2022 will bring, one thing is certain: Major changes are coming to the telecom industry in the post-pandemic world, and fast.

2022 telecom predictions

  • Supply-demand imbalance delays pace of 5G market development
  • Hyperscalers scale out edge cloud
  • Government becomes leader in 5G spend among nontelecom verticals

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Telecom Business Research’s 2022 Predictions is a special series examining market trends and business changes in key markets. Covered segments include cloud, telecom, devices, data center, and services & digital.

5G market update: Insights from TBR’s Telecom team

The global 5G market is entering the ramp stage. Driven by China, the U.S., South Korea and select countries that were among the early deployers of the technology, communication service providers (CSPs) in other countries will begin adopting and deploying 5G over the next five years. Unprecedented government stimulus targeted at the ICT sector and competitive pressures on CSPs to invest will ensure 5G infrastructure is deployed at scale through the middle of this decade.

Join Principal Analyst Chris Antlitz Wednesday, Nov. 17, 2021, for an in-depth, exclusive review of TBR’s 5G Telecom Market Landscape and 5G Telecom Market Forecast, during which he will cover major developments in the 5G market and gives his assessment of where the 5G market is trending over the next five years.

TBR’s 5G Telecom Market Landscape includes key findings, market size, customer adoption, operator positioning and strategies, geographic adoption, vendor positioning and strategies, and acquisition and alliance strategies and opportunities. The 5G Telecom Market Forecast details 5G trends among the most influential market players, including both suppliers and operators. This research includes current-year market sizing and a five-year forecast by multiple 5G market segments and by geographies well as examines growth drivers, top trends and leading market players.

Don’t miss:

  • How and why the 5G market is entering the ramp stage
  • Which CSPs are spending the most on 5G and why
  • What use cases CSPs are focused on for 5G

Register today to reserve your space

TBR webinars are held typically on Wednesdays at 1 p.m. ET and include a 15-minute Q&A session following the main presentation. Previous webinars can be viewed anytime on TBR’s Webinar Portal.

For additional information or to arrange a briefing with our analysts, please contact TBR at [email protected].

WEBINAR FAQS

CSP demand for 5G infrastructure is expected to remain robust for at least the next few years

Key Insights

Traditional RAN will remain the predominant architecture through 2025. Open vRAN will take time to mature and go mainstream.

Mobile broadband (MBB) and fixed wireless access (FWA) will remain primary use cases for 5G; government and enterprise pursuit of digital transformation wil drive other use cases.

APAC will lead the world in 5G investment through the forecast period. The U.S. and parts of Europe will be fast following, while most of rest of world will lag.

CSP demand for 5G infrastructure is expected to remain robust for at least the next few years; the issue is supply

TBR’s 5G Telecom Market Forecast details 5G trends among the most influential market players, including both suppliers and operators. This research includes current-year market sizing and a five-year forecast by multiple 5G market segments and by geographies well as examines growth drivers, top trends and leading market players. TBR’s 5G Telecom Market Landscape includes key findings, market size, customer adoption, operator positioning and strategies, geographic adoption, vendor positioning and strategies, and acquisition and alliance strategies and opportunities.

Global governments will drive 5G development through stimulus initiatives and preference for domestic suppliers

Government stimulus will advance global 5G development; government support of domestic suppliers will aid smaller vendors

Unprecedented fiscal and monetary stimulus unleashed amid the COVID-19 pandemic will fund, both directly and indirectly, a large portion of the infrastructure cost for economic digitalization. As of August 2021, TBR estimates $3.5 trillion, or around 10% of global fiscal and monetary stimulus announced to date, will funnel into the ICT market over the next five years, a few hundred billion dollars of which is earmarked for 5G-related initiatives. communication service providers (CSPs) and their suppliers will be key beneficiaries of government stimulus, which will help CSPs ease their capex and opex burdens as they migrate to a 5G network architecture and will ensure they have the capital necessary to keep their businesses going and their debt obligations satisfied.

The rise in protectionism and government sponsorship of 5G initiatives, such as open RAN, presents opportunities for smaller RAN vendors to gain share versus incumbent OEMs. A growing number of countries aim to build domestic 5G solutions and ecosystems and are leveraging protectionist government policies and pressure on CSPs to do so, which is leading to a fracturing in the 5G market. These policies are designed to address national security concerns and to drive countries toward technological self-sufficiency and away from dependency on vendors domiciled in other countries. A prime example is the U.S. government’s strong backing of domestic open RAN vendors such as Altiostar, Mavenir and Parallel Wireless. Other countries that are pursuing similar nationalistic strategies include China, the U.K., the European Union, Japan, India, South Korea, Russia, Taiwan and Vietnam.

Coopetition is increasing globally as CSPs collaborate to share 5G network resources 

CSPs are pooling network resources to ensure nationwide 5G coverage despite competitive implications. For instance, Dish Network’s new network agreement formed with AT&T will enable Dish to support its customers while it builds its own 5G network and will provide AT&T with at least $5 billion. However, the deal will likewise limit AT&T’s customer growth from relatively higher-value retail customers if Dish’s wireless business is successful in the long term.

Other global partnerships include China Mobile’s and China Broadcasting Network’s network sharing and construction agreement, South Korean operators partnering to share 5G network infrastructure in rural markets, and Russian operators agreeing to share equal access to 5G spectrum in the country.

Customer incentive to upgrade to 5G is gradually improving though monetization remains limited

Consumer adoption of 5G services is gradually increasing and subscribers are being incentivized by expanding 5G coverage availability, accelerating data speeds, aggressive 5G device promotions, and the introduction of lower-priced 5G handsets.

Monetization remains limited, however, especially in the business-to-business space due in part to the delay of 3GPP’s Release 17, which provides industry standards for key features such as network slicing. 5G is initially being monetized primarily by fixed wireless services and serving as an incentive for customers to migrate to more expensive service plans.

TBR’s 5G Telecom Market Forecast details 5G trends among the most influential market players, including both suppliers and operators. This research includes current-year market sizing and a five-year forecast by multiple 5G market segments and by geographies well as examines growth drivers, top trends and leading market players. TBR’s 5G Telecom Market Landscape includes key findings, market size, customer adoption, operator positioning and strategies, geographic adoption, vendor positioning and strategies, and acquisition and alliance strategies and opportunities.

Hyperscalers begin to shift capex from central cloud build-outs to edge cloud build-outs

Hyperscalers’ focus is on creating value from distributed computing

Hyperscalers are at the cusp of scaling out their edge computing deployments as they focus on creating value from distributed computing, which is a key foundational aspect of their digital ecosystem initiatives. They must pivot from centralized data center build-outs to building out the edge to achieve the latency and quality of service that new network use cases will require.

TBR believes the world’s largest hyperscalers are all likely to extend their cloud footprints closer to endpoints through this decade and expects hyperscaler capex will shift significantly from central cloud to edge cloud over the next five years. The Big Nine hyperscalers will drive significant innovation in the edge space, contributing design references, technology standards, and best practices to facilitate ecosystem development.

Hyperscalers have been experimenting with ways to make it more economically feasible to deploy distributed edge network resources at scale. The commercial model will likely see hyperscalers partner with ecosystem stakeholders, such as tower companies and data center real estate investment trusts, to offset the financial burden of deploying, owning and operating edge compute environments. For example, a hyperscaler could partner with tower companies to site micro data centers at the base of cell sites and plug directly into the access and backhaul network.

Models such as this would help defray the cost and complexity of building and managing many sites. TBR also believes telco sites, such as central offices and aggregation hubs, are logical locations for edge compute resources. These facilities are usually strategically located, are owned and controlled by the operator, have access to power and cooling, have fiber readily available, offer secure access, and are ruggedized to withstand the elements.

Total CSP Edge Compute Spend 2020-2025E

Telcos are divesting their tower assets, which limits their opportunities and market leverage in the edge compute space; supply issues delay rollouts

Telcos relinquishing control over network sites opens door for hyperscalers

Hyperscalers are likely to continue their encroachment of network ownership as they build out their distributed computing platforms. Network access sites, particularly cell sites such as towers, are of unique strategic importance as hyperscalers aim to extend their platforms closer to data origination sources. The ultimate shift toward open virtual RAN and the radio intelligent controller will also spur significant innovation at the access layer of the network, which will prove to be an area of keen interest to hyperscalers that are looking at how to capitalize on new opportunities presented by edge computing, 5G and AI.

TBR believes it is highly likely that hyperscalers will become key customers of shared infrastructure owners, particularly towercos, during this decade as their reach extends beyond their central clouds.

Supply chain constraints will delay peak telecom edge compute spend growth rate to at least 2023

Delays in chipset availability — partly due to the COVID-19 pandemic and partly due to geopolitical factors and technological complexity — will slow the pace at which the vendor ecosystem can meet customer demand for edge compute infrastructure through at least 1H22. Supply chains should be able to meet demand by 2H22, setting the stage for projected 66.7% year-to-year growth in the market in 2023.

Shipping constraints are another headwind to meeting demand. Even if products can be manufactured, there are chronic problems with exporting and importing those products and bringing them to customer sites. This too will push out build timelines.

TBR’s Telecom Edge Compute Market Forecast, which is global in scope, details edge compute spending trends among communication service providers, which include telecom operators, cable operators and hyperscalers. This research includes current-year market sizing and a five-year forecast by multiple edge compute market segments and geographies. TBR’s Telecom Edge Compute Market Landscape, also global in scope, deep dives into the edge compute-related initiatives of stakeholders in the telecom market, including telecom operators, cable operators, hyperscalers and vendors that supply the telecom market.

TBR projects CSP spend on edge compute infrastructure will grow at a 46.1% CAGR from 2020 to 2025 and reach $100B

Key Insights

The Big Nine hyperscalers will collectively outspend the combined outlays of telcos and cablecos on edge compute infrastructure before the middle of this decade.  

All Big Nine hyperscalers are investing in the edge in some way. Amazon, Microsoft and Google have global ambitions for edge, though and the hyperscalers intend to partner with and/or compete against telcos and cablecos in the edge space.

Delays in chipset availability — due to the COVID-19 pandemic, geopolitical factors and technological complexity — will slow the pace at which the vendor ecosystem can meet demand for edge compute infrastructure through at least 1H22.

TBR projects CSP spend on edge compute infrastructure will grow at a 46.1% CAGR from 2020 to 2025 and reach $100B

TBR’s Telecom Edge Compute Market Forecast, which is global in scope, details edge compute spending trends among communication service providers, which include telecom operators, cable operators and hyperscalers. This research includes current-year market sizing and a five-year forecast by multiple edge compute market segments and geographies. TBR’s Telecom Edge Compute Market Landscape, also global in scope, deep dives into the edge compute-related initiatives of stakeholders in the telecom market, including telecom operators, cable operators, hyperscalers and vendors that supply the telecom market.

Limited set of vendors to continue benefiting from China’s 5G rollout

China’s 5G deployment was the driving force behind TIS market growth in 2020

Following the temporary shutdown associated with China’s initial battle with COVID-19 in 1Q20, China’s CSPs accelerated the rollout of 5G RAN, deploying over 700,000 5G base stations in 2020, in addition to the 100,000 base stations that were rolled out in 2019. TBR believes the country is nearing peak 5G RAN deployment levels after growth for Huawei, ZTE and China Communications Services (CCS) slowed in 4Q20, but China’s investment in 5G will remain elevated in 2021, with between 600,000 and 1 million base stations set for deployment as the government makes 5G a centerpiece technology of its newest national infrastructure development initiative.

A significant and growing portion of China’s government stimulus is being allocated to enable the ICT sector to accelerate infrastructure and ecosystem development. China has earmarked over $1.4 trillion for ICT initiatives over the next five years. These investments will primarily benefit CCS, Huawei and ZTE, though Ericsson and smaller China-based vendor CICT are also taking part in 5G RAN builds. China’s government heavily influences CSPs’ contract allocation and prioritizes business for domestic firms. Huawei was allocated the bulk of business in the 5G cycle, increasing its share from the LTE cycle, and TBR expects Huawei will maintain its leading market share, despite supply chain disruptions.

TBR believes that due to stockpiling, China’s ICT ecosystem has sufficient chipsets to meet the country’s 5G RAN deployment targets in 2021, which suggests the supply chain encumbrances instituted by the U.S. government are not having a significant impact on China’s original 5G deployment timelines.

Register today for an exclusive TBR webinar examining TBR’s Telecom Infrastructure Services (TIS) Global Market Forecast for 2020-2025, including the expected market impact of unprecedented government support in telecom over at least the next five years and increasing support, and mandate, from Western-aligned governments for CSPs to swap out gear from Huawei and ZTE.

Government stimulus and enterprise digital transformation will accelerate 5G deployments

Government stimulus will accelerate 5G rollouts

An increasing number of governments worldwide are becoming directly and/or indirectly involved in ensuring new technologies, such as 5G, are widely deployed in their respective countries. This spend is, in many cases, tied to economic recovery packages to counter the impact of the COVID-19 crisis and is being justified based on economic, national security and public health grounds.

TBR’s research indicates governments worldwide will invest in excess of $2 trillion in the ICT sector over the next five years, starting in earnest in 2021. Of that $2 trillion, several hundred billion dollars will flow directly into the 5G market, primarily for the purposes of providing internet access to underserved and unserved people around the world as well as ensuring respective economies are able to transform to be relevant and competitive in the digital era.

China’s CSPs will maintain an accelerated 5G rollout in 2021; domestic vendors will be primary beneficiaries

Following the temporary shutdown associated with China’s initial battle with COVID-19 in 1Q20, China’s CSPs accelerated rollout of 5G RAN, deploying 700,000 5G base stations in 2020, in addition to the 100,000 base stations that were rolled out in 2019. China’s investment in 5G will remain elevated in 2021, with between 600,000 and 1,000,000 base stations set for deployment as the government makes 5G a centerpiece technology of its newest infrastructure development initiative.

These investments will primarily benefit China Communications Services (CCS), Huawei and ZTE, though Ericsson and smaller China-based vendor CICT are also taking part in 5G RAN builds. China’s government heavily influences CSPs’ contract allocation and prioritizes business for domestic firms. Huawei was allocated the bulk of business in the 5G cycle, increasing its share from the LTE cycle.

TBR believes China’s ICT ecosystem has sufficient chipsets to meet the country’s 5G RAN deployment targets in 2021, which suggests the supply chain encumbrances instituted by the U.S. government are not having a significant impact on China’s original deployment timelines.

CSP 5G Capex Spend 2019-2024E

The 5G Telecom Market Landscape includes key findings, market size, customer adoption, operator positioning and strategies, geographic adoption, vendor positioning and strategies, and acquisition and alliance strategies and opportunities.