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As the pandemic continues to push customers to hybrid IT, vendors aim to meet demand with flexible, cloud-like pricing models

Average revenue growth for vendors in TBR’s Cloud Components Benchmark increased 12.6% year-to-year in 3Q21, partly due to a favorable year-ago compare considering the economic impacts of COVID-19 in mid-2020. Further, with many vendors operating transactional-heavy business models, rebounding demand for license products supported revenue growth during the quarter, especially for software-centric vendors like Microsoft and VMware. COVID-19 is causing customers to reevaluate their digital transformation plans; this may include migrating completely to a cloud environment, which will erode opportunities for some vendors while others will expand their existing data center investments through solutions like hyperconverged infrastructure (HCI).

Software-centric circles are blue. Hardware-centric circles are orange.

Given some customers’ reluctance to move outside the data center, opportunities arise for vendors to push ‘as a Service’ offerings

According to TBR’s 2H21 Cloud Infrastructure & Platforms Customer Research, 42% of respondents plan to keep most of their workloads inside the data center over the next three years. As COVID-19 accelerates customers’ cloud migration timelines, many enterprises turn to self-built private cloud environments as an intermediary step to a fully managed vendor-hosted private or public cloud model.

Further, many larger, established enterprises are looking to protect their existing investments in IT and find that their own data centers are a better fit for certain workloads, particularly those with stringent security or latency requirements. These customer trends present opportunities for hardware-centric vendors such as Hewlett Packard Enterprise and Dell EMC to capitalize on demand for cloud-like consumption services on premises in the coming years.

Data center consolidation persists

Many self-built private cloud customers adopt HCI solutions to modernize their legacy systems and consolidate their overall data center footprint, a trend brought on by cloud migrations and exacerbated by the pandemic. Colocation is emerging as a notable alternative to privately owned data centers in this model, as customers are offered a secure landing spot for their hardware while providing high proximity to major public cloud platforms. Recognizing this trend, OEMs are partnering with colocation providers to offer central management and governance capabilities that facilitate customers’ workloads.

Vendor competition ramps up amid high demand for cloud-like economics on premises

The cloud components market is consolidating around select vendors, such as Microsoft and VMware, specifically in the virtualization space. However, on the hardware side, vendors are emphasizing their consumption-based pricing offerings, seeking differentiation by taking a workload-by-workload approach. While in general IBM has been lacking in consumption-based hardware, the company is expanding its investments in the area, evidenced by the release of the company’s Tailor Fit Pricing solution for hardware consumption, which applies a pay-as-you-go model to a highly scalable, premium solution like IBM Z.

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Register for our upcoming webinar, 2022 Predictions: Cloud, an in-depth discussion on the increasing importance of cloud partnerships in the market; how partners will enable growth and stickiness; vendor embrace of open, hybrid architectures; and more.

2021 will bring more demand, more partnerships, more industry innovation to cloud

Certain uncertainty will accelerate cloud adoption in 2021

Despite living with the COVID-19 pandemic for most of 2020, so much remains uncertain. The timing and impact of a vaccine, whether or not there is additional government stimulus, and the changing economic environment will all have a profound impact on what occurs in 2021, and those are just the factors we know about. This uncertainty is reflected in TBR’s survey of 200 IT decision makers. When asked when they expect the business impacts of COVID-19 will subside, 78% of respondents expect the effects to subside sometime in 2021, but the responses diverge in terms of which quarter of 2021.

As a result of this continued uncertainty, flexibility in business operations and the IT resources that support them is more valuable than ever. Cloud was sought out based on necessity during the initial outbreak of COVID-19, but that behavior will persist in 2021 for two main reasons: flexibility and innovation. The ability to shift resources, enable more remote work, and scale cloud services up and down as needed are value propositions that resonate especially well in the current environment. Innovation is a broad concept and can cross analytics, integration and security realms. More generally, customers see value in the ongoing investments their cloud providers are making and in their ability to seamlessly access those enhancements. For these reasons, customers expect to accelerate their cloud adoption in 2021, regardless of exactly when the effects of COVID-19 subside. They may not know exactly what the business climate will hold, but they understand the flexibility and innovation that come with cloud-delivered solutions will play a role in helping them weather 2021.

2021 Cloud Predictions

  • Industry clouds become the norm
  • Partnership models support cloud demand in new era
  • Containers will challenge the legacy virtualization model

Technology Business Research 2021 Predictions is a special series examining market trends and business changes in key markets. Covered segments include cloud & software, telecom, devices & commercial IoT, data center, and services & digital.

Ericsson’s focused strategy and strong 5G position yield results

TBR perspective

Ericsson’s recovery continues into its third year, evidenced by revenue growth and expanding margins, trends that TBR expects to continue in 2020. A strong 5G position with respect to both RAN and mobile core is a significant driver of this improvement as Ericsson’s early technology bets and increased investment in Networks unit R&D are spurring CSP adoption of Ericsson’s competitive 5G portfolio. Ericsson has notched high-profile wins in 5G and grown its market share at Huawei’s and Nokia’s (NYSE: NOK) expense thanks to ERS, which offers an attractive total cost of ownership and a powerful baseband unit. As restructuring progresses, Ericsson will shift from an emphasis on cost reduction and efficiency to a disciplined growth mindset, evidenced by the recent acquisition of Kathrein’s antenna business and an effort to poach LTE customers from rivals for 5G upgrades. With China deploying 5G en masse in 2020 and the next wave of adopters expected to roll out through the early 2020s, Ericsson has the ability to wring a few more years of growth and market share gains from this cycle.

TBR views Ericsson’s turnaround as a success, but multiple headwinds will take shape over the next few years, such as vRAN; the rise of disruptive startups like Altiostar, Mavenir and Parallel Wireless; and uneven CSP spending. TBR believes Ericsson has baked 5G market share gains in China into its 2020 guidance. These gains are likely to come at Nokia’s expense.

Long term, Ericsson is hoping that emerging businesses including IoT Accelerator, Edge Gravity and eModo scale up. The company needs to succeed in an area outside of RAN and core to maintain share, but Ericsson is not currently preparing to expand its addressable market in terms of enterprise verticals.

Ericsson (Nasdaq: ERIC) hosted its annual Industry Analyst Forum in Boston, bringing along a range of executives to provide an update on the company’s corporate strategy, which includes continued restructuring, particularly within Digital Services, as well as infusing AI and automation across key product areas and selective expansion in emerging technology areas. 5G, however, was the dominant topic due to Ericsson’s market share gains spurred by the Ericsson Radio System (ERS), which is optimized to meet the cost-conscious needs of communication service providers (CSPs). Similar to last year, the tone of Ericsson’s 2019 analyst day was upbeat as the company continues to execute its focused strategy — now in its third year — which is driving improvement in its financial metrics. Following the main session, analysts could attend three tracks — Building the Network Platform, Automation in 5G Operations, or New Business Opportunities for Service Providers (i.e., IoT, private cellular networks and fixed wireless access [FWA]) — and then participate in one-on-one speed meetings.

AT&T Trumpets SDN Milestone, Reiterates Virtualization Goal

“In the realm of NFV and SDN, AT&T is among the leaders in transitioning its network to this new architecture, said Chris Antlitz, telecom principal analyst at Technology Business Research.

Significant Achievement in SDN

“‘The 75% is a significant number. They’ve built an underlay I believe for their SD-WAN … versus a lot of other operators that are doing an [over-the-top] type play,’ Antlitz said. ‘AT&T is doing it more from the ground up and from that viewpoint this makes it a little bit more significant.'” — SDxCentral

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TBR estimates 30% of total global CSP spend (capex and external opex) will be on or related to NFV/SDN in 2023

5G will push CSPs to accelerate and broaden their NFV/SDN initiatives

According to Technology Business Research, Inc.’s (TBR) latest NFV/SDN Telecom Market Forecast, covering 2018 to 2023, 5G will push CSPs to adopt a new network architecture and both NFV and SDN will be critical aspects of that architecture going forward. As such, TBR expects NFV/SDN-related spend growth will correlate with 5G deployments. Since CSPs will need to upgrade their networks from an end-to-end perspective to realize the full potential of 5G, this will naturally drive CSPs toward the virtualization and cloudification of their networks. This trend will impact most, if not all, of the major network domains from an NFV/SDN perspective over the next five years. TBR notes that 5G core is inherently virtualized and that this will also naturally push CSPs deeper into the NFV/SDN space over the next five years as they transition to a stand-alone 5G network.

Rakuten’s legitimization of vRAN will also drive NFV/SDN market growth

Though significant skepticism remains in the industry that Rakuten will be able to make the vRAN model work, should this scenario occur, TBR believes it would embolden CSPs to double down on their own NFV/SDN initiatives, especially as it relates to vRAN. RAN is one of the costliest domains in the construction of a network, and it is a key area CSPs will be keen to virtualize to reap cost savings.

White-box adoption will proliferate, portending significant OEM disruption

TBR expects the use of white-box hardware in NFV/SDN environments will proliferate through the forecast period, accounting for 60% of NFV/SDN hardware spend in 2023, up from 15% in 2018. This industry shift toward white-box hardware will significantly disrupt incumbent OEMs’ business models, prompting them to evolve into software-centric companies. Industry organizations such as the Open Compute Project (OCP) and initiatives spearheaded by leading CSPs such as AT&T will fuel the rapid uptake of white boxes during the forecast period.

5G will push CSPs to accelerate and broaden their NFV/SDN-related initiatives

Mainstream adoption of NFV/SDN will coincide with 5G ramp

Leading communication service providers (CSPs) will accelerate and broaden their network transformations en route to deploying 5G and becoming digital service providers (DSPs). Softwarization, virtualization and cloudification are foundational aspects of a DSP’s network. These CSPs, which started their network virtualization journeys in the mid-2010s with virtual machines, are now transitioning to containers and ultimately to a cloud-native, microservices-based architecture.

Additional research:

5G will push CSPs to accelerate and broaden their NFV/SDN-related initiatives

According to TBR’s 1Q19 NFV/SDN Telecom Market Landscape, leading operators will accelerate and broaden their network transformations en route to deploying 5G and becoming digital service providers (DSPs). Softwarization, virtualization and cloudification are foundational aspects of a DSP’s network.

5G is greatly enhanced when using virtualization, especially when enabling and maximizing the benefits of network slicing and achieving better radio access network (RAN) economics. Though most operators intend to initially deploy the non-stand-alone (NSA) standard of 5G, which tethers 5G radio with evolved packet core (EPC), an eventual upgrade to the stand-alone (SA) standard, which tethers 5G radio to a 5G core, will become a reality in the early 2020s.

5G core is inherently virtualized, and communication service providers (CSPs) will be keen to prepare their networks to maximize the benefits of utilizing a fully virtualized network architecture, which includes, but is not limited to, increasing agility, flexibility, visibility and cost efficiency.

In 2019 Rakuten will become the first fully virtualized DSP in the world. Should the company’s approach to network architecture work, it will legitimize and embolden other CSPs to double down on their network transformations and hasten their migration to white-box hardware and cloud-native architectures.

CSPs are under pressure to invest in NFV/SDN to reduce total capex and opex spend as well as introduce new services and stay competitive in the data-driven digital economy, which is increasingly dominated by webscale and over-the-top players. This pressure will prompt more CSPs to spend on NFV/SDN during the forecast period. TBR expects 27.5% of total CSP capex and external opex spend will be allocated to NFV/SDN by the end of 2022.

total global csp nfv/sdn spend

Cost of ‘intelligent connectivity’ must decline significantly for intelligent world to unfold

TBR perspective

Realizing the intelligent world presented by the mobile industry at Mobile World Congress Barcelona 2019 (MWC19) will require a fundamental change in how networks are architected, including a radical reduction in the cost of providing connectivity. It will also require business transformation for companies tied to the old world, namely communications service providers (CSPs) and their incumbent vendors.

It was readily apparent at the event that technology is advancing at a much faster pace than the establishment of business cases that economically justify deployment of the technology. The reality for the mobile industry is that the cost of building, owning and operating networks is too high and networks are too inflexible to support the business realities of the digital era, whereby connectivity is relegated to a commodity service and the value lies in the platforms and applications that run over the network. The industry has known this for years, but changes have been minimal, until maybe now.

The entrance of Rakuten to the mobile industry could be a game changer and provides a glimpse into what a digital service provider will look like. In what could arguably be the most important takeaway from the entire event, Rakuten’s approach to building and operating a network could signify a paradigm shift in the industry. Not only will Rakuten’s network be agile, flexible and dynamic to provide digital services, it will also enable a dramatic reduction in the cost of connectivity.

The theme of MWC19 was “intelligent connectivity” and centered on how 5G, IoT, AI and big data are coming together to enable the intelligent world. Against this backdrop, Rakuten stole the show with the evangelization of its end-to-end virtualized and cloud-native network, which is being deployed across Japan this year. Rakuten’s network provides a glimpse into what the intelligent network of the future will look like.

Ericsson’s turnaround is in process, but sustainability of business is in question

TBR perspective

Though Ericsson’s focused strategy has proved to be a viable approach to stabilize the company, return it to profitability and provide incremental organic growth, the key concern will be how sustainable that stability and growth will be over the long term.

Ericsson’s focus on the wireless access domain tethers the company to the whims of that market, which is undergoing significant disruption as 5G and virtualization take hold and as operators increasingly shift capex budgets from connectivity infrastructure to building digital businesses, limiting Ericsson’s growth potential. Though there is room for Ericsson to take market share, particularly from Nokia (NYSE: NOK), Huawei and ZTE by leveraging its software-upgradable Ericsson Radio System (ERS) RAN gear, Ericsson is not immune to adverse business trends impacting the broader RAN market, namely legacy decommissioning, virtualization, openness, cloud and white box.

Ericsson is betting its ERS will offset the impact of these adverse trends and hasten its shift to a more software-centric entity with a more recurring, license-based software model that carries relatively high, sustainable margins, but this shift will take years to unfold and there is significant legacy business at risk of disappearing in the interim.

With the architecture of the network fundamentally changing to be virtualized and cloudified and communication service providers (CSPs) focused on relentless cost efficiency and TCO reduction, Ericsson will have to carefully balance its shift from the old world to the new reality, whereby forklift RAN upgrades become lower scale and targeted, and innovation and value migrate to the software layer. This has significant implications for Ericsson’s hardware and close-to-the-box services businesses, both of which are optimized to operate at high scale for efficiency and profitability.

TBR notes Ericsson and its close rival Nokia are pursing different paths during the 5G era. While Ericsson focuses on its core business of selling RAN and mobile core directly to service providers, Nokia is taking an end-to-end infrastructure approach and is building out a dedicated business unit with a full suite of resources to directly sell to enterprises. Though Industry 4.0, 5G and digital transformation are underlying themes that find commonality between the two vendors, their divergent tracks are noteworthy.

 

 

Ericsson (Nasdaq: ERIC) hosted its annual Industry Analyst Forum in Boston, bringing along a range of executives to provide an update on the company’s corporate and business unit strategies, with a focus on Networks, Managed Services and North America. Key topic areas included 5G, Internet of Things (IoT), automation and artificial intelligence (AI). Following the main session, analysts could attend three tracks — Network Evolution to 5G, AI and Automated Operations, or 5G and IoT Industry Innovation — and then participate in one-on-one speed meetings. The tone of Ericsson’s 2018 analyst day was upbeat as the company sees early signs that its turnaround plan is yielding results, evidenced by its 3Q18 earnings results in which organic revenue growth returned and margins improved markedly. Ericsson remains committed to its transformational restructuring and focused strategy, which are key pillars of its turnaround plan.

Technology Business Research, Inc. announces 1Q19 webinar schedule

Technology Business Research, Inc. (TBR) announces the schedule for its 1Q19 webinar series.

Jan. 9            Virtualization flips the axis on technology monetization and adoption

Jan. 23         IoT is getting a lot easier

Feb. 6           The pendulum swings: Customer demands reshape how infrastructure vendors do business

Feb. 13         5G will be an evolution, not a revolution

Feb. 20         Customers care less, vendors buy more, and both sides become more intelligent

Feb. 27         Consulting’s robot army: How RPA changes the consulting business model

Mar. 20        Enabling stakeholders across the healthcare ecosystem to navigate the path to value-based care

TBR webinars are held typically each Wednesday 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].

 

ABOUT TBR

Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, professional services, and telecom vendors and operators. Serving a global clientele, TBR provides timely and actionable market research and business intelligence in a format that is uniquely tailored to clients’ needs. Our analysts are available to address client-specific issues further or information needs on an inquiry or proprietary consulting basis.

TBR has been empowering corporate decision makers since 1996. For more information please visit www.tbri.com.

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