If we assume that 5G will continue to drive telco spending this year, what specific part of telco spending is getting the push, and what vendors are benefitting. According to an SDxCentral piece that cites an analyst report, the answer might be pretty revealing, but not necessarily in exactly the way that the report suggests. There’s a bit of mixing of statistics in the data that can be confusing.
Let’s start by saying that 5G technology isn’t a uniform opportunity because it’s not uniform itself. We have RAN and Core, we have Control Plane and User Plane…you get the picture. At a higher level, we also have the 5G Non-Stand-Alone or NSA that lets 5G ride on an Evolved Packet Core for 4G, and we have 5G Stand-Alone (SA) where 5G RAN marries 5G Core. Generally, specialized mobile vendors like Ericsson and Nokia have played better in the RAN space because of their knowledge of the radio piece of the puzzle, but how well they can leverage that into the Core space, when Core is more about transport, is an open question.
Then there’s the fact that article I reference isn’t purely about 5G, but about telecom equipment and spending in general. It notes that Cisco dropped in market share for the telecom space in 2022, which was a surprise given that in 2021 it was a big market share gainer. VMware managed to be one of the largest share gainers. Obviously there’s a difference between revenue rankings and revenue growth rankings for vendors, and also major differences in the way that vendors fit into telecom networks overall.
One thing that seems clear is that it’s important to look at 5G spending here rather than smear the story over a mixture of network technologies. One big reason is that 5G is budgeted and everything else has to compete for sustaining dollars. I’d argue that one reason for Cisco’s problem in 2022 was that their primary telco products are routers, and routers are a piece of a narrow chunk of 5G infrastructure. VMware, in contrast, is targeting the 5G space for most of its growth, and that’s the space with broader potential. Microsoft was the biggest gainer in terms of growth of market share.
Still, given that 5G RAN generally deploys ahead of 5G core because 5G NSA can leverage 4G packet core infrastructure, that most deployment news seems focused on 5G Core (5G SA), and that if there’s any place where a router vendor could expect to play in 5G, Core would be the place, you have to wonder why Cisco hasn’t gained share. The answer lies in the Control/User plane separation that’s fundamental to not only 5G but 4G as well.
A mobile core (4G/LTE or 5G) has both a user-plane and control-plane element, at least at the edge where it connects with the RAN. The 5G Core connects with the RAN via what’s called a “backhaul” connection to an edge-of-core element that is 5G-specific. Within the core, it uses traditional IP routing. The majority of mobile-specific routing doesn’t take place in the core at all, but out in what 5G calls the “fronthaul” or (in currently favored distributed DU/CU architectures) the “mid-haul” area. This “routing” is a 5G user-plane activity, meaning that it’s done using a UPF and is tunnel-aware. That means that the really 5G-specific stuff isn’t really in the core at all, and that the mobile core is going to exploit routing capacity that’s already in place unless 5G drives up traffic considerably.
Some had predicted 5G would do just that, but the truth is more complicated. Let me offer an example; you’re watching an HD movie on something. That movie has a typical characteristic bit rate of about 8Mbps. Suppose you’re using it on a service with a bit rate of 10 or 20 or 100Mbps. What’s the video bit rate? The same 8Mbps. You don’t push bits into a device, it consumes them based on the nature of what it’s doing. Given that, there’s not a major chance that video bandwidth consumption would be increased by 5G, and video is by far the largest traffic source, and source of traffic growth.
What this means is that Cisco has relatively little change of seeing a big revenue kick from 5G Core even if we could assume they’d win the business. But the fact that 5G Core isn’t really a driver of router opportunity, and that the 5G specificity of the Core is really limited to an edge-of-core or on-ramp function, means that the UPFs used in the RAN mid-haul could also be used in the Core. That in turn means that an operator is likely to use the same core-side UPFs as they used in mid-haul, and they probably got those from their RAN vendor, which almost certainly wasn’t Cisco. There’s a double negative here, a double negative influence that is.
Then there’s the fact that Cisco is the router market share leader, so they have more deployed routers than competitors. Marginal gains in 5G traffic, which as I said are about as much as we should expect, aren’t going to add much to capacity requirements, and that which is added won’t have a major impact on Cisco’s revenue line just because it’s bigger. Triple-negative.
VMware, on the other hand, is a comparative midget in the telco market. A million-dollar gain in revenue from 5G for Cisco could hide in a rounding error, but it might be a big increase for VMware because they earn less from the market. VMware is also focused on open RAN, which is where all the 5G-specialized opportunity is, and as I’ve already noted, Cisco isn’t. Thus, their gain from 5G is unsurprisingly bigger.
There’s a final point here that’s perhaps even more important. Going back to a blog I did on an Omdia study on telco capex, the majority of capital spending is focused on the access network, not the core. In 5G, even 5G FWA, “access” means RAN and mid-haul. If you want to look from growth in 5G opportunity other than radio-linked stuff, you’d really have to look at Open RAN and function hosting, which in my view means looking at metro and edge computing. The opportunity for vendors in 5G may well be only metro-deep.