In conjunction with its recent Rakuten earnings call this week, Rakuten Mobile disclosed some more of its plans.  This mobile operator is becoming a telecom vendor.  Specifically, it said that “by expanding the Rakuten Communications Platform (RCP) globally, Rakuten aims to evolve from a Japan-headquartered tech company to a global leader in telecom.”  We see this as an explicit statement that the company plans to sell its telecom software and related services to operators worldwide.  For instance, Rakuten Mobile just announced a partnership with Saudi-based operator, stc.  This move pits Rakuten against Microsoft (who just acquired telecom companies and runs a cloud), Oracle (who runs a cloud and made telecom company acquisitions), and the rest of the telecom industry (traditionally Nokia, Ericsson, Huawei, ZTE, Amdocs, Netcracker and others). 

In offering RCP to other operators around the world, its unique value, as we see it, is that Rakuten has successfully built an LTE and now a 5G network based on Open RAN.  What we find interesting is that the company has developed a significant amount of intellectual property in-house or through technology sharing.  In an interview today with Tareq Amin, Rakuten Mobile executive, we asked what technology has been developed in-house by Rakuten.  Here’s what we learned.

• OSS (it acquired OSS vendor, Innoeye May 2020, which has sold to 20 other operators)
• BSS (developing in-house; expected completion by April 2021)
• Orchestration
• Radio software (it owns a substantial share of Altiostar)
• Cloud IP.  It cooperates with robin.io and has added significant services mesh, CPU-related optimizations, for instance
• Systems integration to make its “pods”
• Core.  It works with NEC on 5G Core and has access to its source code

Some other components are not developed by Rakuten (the radios come to mind), but this is an exciting development.  RCP would be delivered as a “private cloud” on the premises of carrier customers (partners).  The terminology Rakuten is using for this “private cloud,” is it’s a “pod.”  RCP’s plans are a very interesting development in the industry.

There is one more thing.  Rakuten said it is working with a technology supplier that will sell Rakuten a server card that would allow a combined router and RAN processing function to co-exist on a server.  Today, the servers it uses to support its Open RAN radios use an FPGA NIC.  These servers can support up to 16 base stations.  We see the addition of routing to this card as an extension of the capability – but it means there may be a diminished need for cell site routers. 

Ericsson Capital Markets Day Part Two:

Networks summary:  When asked how it took market share (North American has 53% share 2Q20, up 5% vs 2018), management pointed to having made more significant R&D investments in radio than competitors. It cited Dynamic spectrum Sharing and its cost-efficient radio-related ASICs as examples of valuable features to customers.  
The company expects O-RAN will continue to evolve, with limited uptake starting in 2023.  Cited IPR challenges as one challenge.  Elsewhere in the presentation, it said it is #1 contributor to 5G standards; we take it that this IPR gives Ericsson leverage to slow ‘O-RAN’ down.

Digital Services:
The team said the split of Digital services for T4Q 3Q20 as (excluding IPR, consulting, and learning services):
•    BSS 20%
•    OSS 25%
•    Comm services 15%
•    Packet core 20%
•    Cloud and NFV infra 10%
The Digital Services team has:
•    addressed 37 of the 45 ‘critical and non-strategic’ projects
•    revised its BSS strategy, and it is now 5G focused
•    75% of its portfolio exposed to growth as of 3Q20 sales
•    Cloud infrastructure has 200 customers
•    5G Cloud core has 80 customers (includes “5G” EPC and 5GC SA contracts).  Packet core should grow faster than the others
•    5G SA count is now at 30.  5G SA revenues should begin in 2021 from most of these contracts.
•    BSS has 120 contracts, 9 of which were competitor swap-outs
•    Orchestration has 100 customers
Dig Services software + support in T4Q 3Q20 was about 55% of total revenues, and it expects 60% by 2022.  It has about 40% recurring revenue T4Q 3Q20 and expects it to be about 55% by 2022.  Expects Japanese and Korean operators to deploy SA by the end of 2021; expects Japanese 5G market to ramp very soon because it is a heavy user of iPhones.  It expects 600K 5G base stations in China in 2020 and the same number in 2021.  
Emerging Markets Summary:
Recently acquired Cradlepoint has > 60% GM and a recurring revenue SaaS model.  200K enterprises, 3,000 public agencies, 1,500 channel partners.  It has won 30 dedicated network deals.

650 Group attended the company's recent showcase for investors. This blog will be a two part series.

Part 1:
In Summary:  Management lowered Digital Services margin targets due to a revenue miss in 2020 as legacy systems dropped faster than expected, relative to what was communicated to investors a year ago.  It expects to grow faster than the “>1% CAGR market forecast” set by industry analysts by taking share, expanding in the enterprise market, growing with IoT opportunity, and through M&A (like Cradlepoint). 

We see that the company is betting on the enterprise market for growth, and our take on the implied message was Ericsson would make more acquisitions to beef up enterprise exposure.  While the company was careful to repeat that it is working with SPs go to market, its recently acquired Cradlepoint acquisition has 1,500 channel partners (mostly not SPs).

Financial commentary
•    Margin targets for the Network group will remain the same in 2022 as in 2020 (by 1% higher than was communicated in 2019)
•    Margin targets for Digital Services are 4-7% in 2022 vs. 10-12% as communicated in 2019 (lower because legacy is declining faster than expected and because it is increasing R&D commitment to greater levels)
•    Margin targets for Managed Services are +1% versus year-ago targets
•    Total margin targets are 12-14%, same as a year ago (on increased networks and Managed Services, offset by Digital Services.

Last week, LoRa chip company, Semtech, made several announcements that should accelerate the IoT market.  First, it announced LoRa Basics Modem-E, which is a software modem.  Second, it announced relationships with IoT companies, Actility and Tago.IO that surround services that can be offered to drive the IoT market.  Third, the company announced the LoRa Edge Tracker Reference design, which is a "device to cloud" reference design for asset tracking applications.  In our IoT research, we have forecasted a near-doubling each year over the next five years for LoRa and competing devices.  We believe Semtech's recent announcements as driving the market because they make it easier, cheaper and faster to deploy IoT services.

The LoRa Basics Modem-E allows customers to use modem capabilities from Semtech, where previously the customer would have had to have developed this technology itself or commissioned a third-party software design house to develop it for them.  We see it as a slight increase in the "footprint," or addressable market in each IoT device that benefits Semtech.  However, Semtech's Director of LoRa Product Line Management in Semtech's Wireless and Sensing Product Group, Sree Durbha, explains, using the Modem-E can reduce the total cost of ownership of an IoT application by as much as 47% over three years for a deployment of ten thousand devices or more.  The savings come from both up-front savings and ongoing savings.  Upfront savings are from being able to use a smaller microcontroller unit (MCU) with a smaller footprint, reduced non-recurring engineering (NRE) spending to develop the modem, and reduced certification costs enabled by the LoRa Basics Modem-E.  The ongoing savings come from maintenance and testins costs for future modem releases, which Semtech will make available to its customers and partners on a regular basis.

We spent some time discussing the cloud service with Mr. Durbha, as well, and learned that Semtech's LoRa Cloud service can enable geolocation and LoRa device and application services like GNSS almanac updates.  We tried to get a general sense for the prices involved on a per device basis and learned that for the asset tracking application, each device can be tracked for under $1/year.  There are many variables that come into play like usage rates, for instance, that can change this number.

All told, we think that by offering reference designs, tight relationships with service providers, developing more of the footprint of an IoT system, and reducing costs to customers, Semtech is working to accelerate the IoT market - and of course, its participation with LoRa technology.

On October 14, 2020, Nokia and Google Cloud signed a strategic collaboration to transform Nokia’s digital infrastructure.  We made inquiries to Nokia to learn more and had the opportunity to speak with Nokia’s Chief Digital Officer, Bhaskar Gorti, who is in charge of the relationship. Nokia’s move to Google Cloud is one of the first major policy decisions under new CEO Pekka Lundmark.  In our interview with Gorti, we learned several things:
* •    Nokia expects the total transition time to the cloud to take about 18-24 months
* •    Nokia is moving as many of its internal IT systems to commercially available Software as a Service (SaaS) as possible, in a move that is also underway at most, if not all, of Nokia’s customers
* •    When a SaaS system is not available for Nokia’s needs, it will be moving those workloads to Google Cloud.
* •    For certain on-premises workloads where a move to SaaS is not available or it does not make sense to move towards Google Cloud, the company will “sunset” these applications and find other business processes as an alternative to the legacy applications.
* •    For internal R&D and manufacturing needs, the teams will make a decision whether move to computing, storage and related infrastructure on premises or move them to SaaS or cloud.  Each of these functional teams have product and delivery timelines that could be disrupted by a move to cloud and therefore each is being given a high degree of autonomy on the decision.
We learned that Nokia’s primary motivation in moving towards SaaS and to Google Cloud was to align its digital business practices to be more similar to those of its customers.  Secondarily, over time, Nokia expects to realize some savings by moving to SaaS and to Google Cloud.  

Gorti explained: “We are very confident this [move to SaaS and Google Cloud] will be of beneficial long-term economical savings.  This will allow us to redirect more investment to other areas.”

Nokia is becoming more like a cloud company, and this is great for everyone as we transition to a 5G environment.  Nokia is reshaping itself to be more nimble like cloud and SaaS companies in order to better serve its telecom and enterprise customers.

Today, Juniper announced its plans to acquire 128 Technology for $450 M.  The deal is expected to close in calendar 4Q20.  128 Technology executives have a strong technology heritage from Acme Packet (SBC company acquired by Oracle).  128 Technology’s unique session-smart networking enables enterprise customers and service providers to create a user experience-centric fabric for WAN connectivity.  

We see a strong synergy with Juniper's enterprise portfolio where combining 128 Technology’s software with Juniper SD-WAN, WAN Assurance and Marvis Virtual Network Assistant (driven by Mist AI) gives customers a path to full AI-driven WAN operations.  A trend that is even more important s branch location adjust to COVID-19 and remote work becomes even more important to the enterprise.
 
The market trends towards single-pane and single vendor in branch deployments continues.  Our research has consistently shown a larger percentage of companies wanted to purchase from the same vendor and make the buying decision at the same time instead of stand-alone decisions or seeing portions of the decision as overlay networks.  COVID-19 changed how many businesses operate, the WFH trend, and how enterprises reopen locations in the future is forever changed.  Data, the network it relies on, and AI/ML automation are more critical than ever.

128 Technologies also feeds well into Juniper's existing customers and existing channels.  With the significant difference in Europe vs. North America and Large vs. Small, the channel is playing an increasingly important role in supporting business buying decisions.  The move also increases Juniper's exposure to subscription and software revenue, an area of focus for the company.

While 2020 is a down year for networking because of COVID-19, the future is bright.  Our projections for campus switching, WLAN, and SD-WAN all indicate positive CAGRs through at least 2025, with the branch making up approximately 33% of the switching and WLAN markets.

Today, Alan Weckel participated in Intel's webinar on how technology is changing from the edge to the cloud.  It was clear working on this project that the data center is rapidly innovating to next-generation technologies to keep pace with data growth.  How will networks for communication service providers (CoSPs), cloud service providers (CSPs), and enterprises evolve to handle the dramatically increasing data volumes expected in the coming years? Increasing data volumes are being driven today by smartphones, laptops, IoT, and, in the near future, by emerging 5G-enabled services. 650 Group's internal projections indicate that data entering/exiting the data center (north/south) is driven mostly by consumer content (e.g., video). In contrast, a wide range of use cases ranging from enterprise applications, consumer data, and cloud applications drive data between machines.
 
As part of the webinar, we authored a white paper on how quickly technology is involving in the data center.  As we did our end-user interviews during the last few months, we saw many advancements in technology to support the growth of data in the cloud.  We are excited to see all the new announcements coming as we close out 2020 and enter 2021.

Please download the white paper by clicking on the link below.

Nokia reiterated its commitment to 25G PON in its two-day briefing with industry researchers this week.  It also shared some interesting commentary about is progress with Fixed Wireless Access (FWA) and its consumer Wi-Fi devices.  But, what makes Nokia’s 25G announcement so interesting is that there is significant controversy associated with the 25G standardization process; 50G PON is also in the race for standardization, too.  It seems that the world will split into two purchasing groups: Chinese and Western.  We think the fact that two purchasing groups will emerge is a material negative for the telecommunications industry and is a sign of things to come.  Nokia has decided to chart its own path, find partners, and make the best of this controversy.  Our view is that Nokia’s 25G PON offerings will see more demand than 50G PON in the upcoming years, and when 50G finally becomes necessary, Nokia can move to support it.

For background, in May 2020, Huawei announced to analysts that it is backing a 50G standards process, in cooperation with the ETSI.  Huawei calls its 50G development “F5G,” which stands for Fixed 5G.  It demonstrated over a video presentation an FPGA-based prototype, and it and explained that it expects this technology to be adopted first by the mobile infrastructure market for connecting RAN radio systems to baseband systems and for backhaul.  Then Huawei expects the market will develop for residential PON, and later for enterprise campus connectivity (to replace Ethernet switches).  Huawei explained that in February 2020, it has the support of Chinese operators, ETSI members in Switzerland, a European operator, Altice Portugal, and Chinese operators.

On the other hand, Nokia had developed a chipset that specifically supports both GPON and next generation PON technologies; it is called Quillion and has been available for nine months.  Nokia had consistently explained on several occasions in the past several months that during a February 2020 ITU meeting relating to 25G PON, 18 members of the ITU were in favor of initiating the 25G standardization project (including ATT, BT, Korea Telecom, nbn Co, Telecom Italy, SK Telecom, Telus etc).   However, there was a minority coalition led by operators and vendors from China that objected to the proposal on the grounds that 25G PON would pre-empt their futuristic vision of 50G PON.  This in turn resulted in no consensus being met.

In response, Nokia has worked with operators and suppliers interested in pursuing 25G PON in the near-term, which we interpret as the next 1-2 years.  This MSA (multi-source agreement) strategy is used by various groups in the technology industry when there is sufficient buying power to move ahead of (or in this case, without) standards ratification; we see if used frequently by hyperscalers when building their bleeding-edge data center infrastructures.  We understand that there are a handful of operators, including Chorus (New Zealand), Chungwa Telecom (Taiwan), and NBN (Australia) and several technology suppliers including AOI, MACOM, MaxLinear, Ciena, Tibit and others.  The MSA has a website with more information.

Nokia explains that 25G PON shares the same optical technologies as those used in Ethernet Switches that are common and used by data centers and campus switching environments.  Sharing common optical technologies with high volume data center deployments will reduce costs . Our view is that in a few years, data center switching demand for 25G optics will continue to rise, and this is perfect timing for Nokia and others who are going to use 25G for PON because the supply will be there and this technology will be mature and lower cost.

There’s one other thing to consider that pits Nokia against others.  It decided to develop its own semiconductors to power its infrastructure PON systems (OLTs).  Nokia’s chip system is called Quillion, and its introduction means it won’t be dependent upon OLT chip vendors.

​What’s even more interesting about this whole debate is just how future-looking it is.  PON has moved through two main generations, GPON (2.5 Gbps), 10 GPON (XGS and XGPON), and now we are talking about two different generations, 25G and 50G.  Huawei’s 50G “F5G” approach is a “if you can’t join ‘em, beat em” strategy, where Huawei will leverage its home market telecom operators’ volume and a few others to work outside its home territory.  Huawei will leverage this technology to three markets over time: 5G backhaul, residential PON and enterprise networking.  On the other hand, Nokia is taking matters into its own hands in that it has developed its own chips.  What’s happening now is not uncharted waters, but it is rare for the telecommunications industry to splinter into multiple buying groups – usually standards are developed and followed for the benefit of the industry.  This time, in the absence of standards, Nokia has forged on ahead on its own and its headstrong ways are likely to benefit it because many Western operators and now actively seeking to diversify away from Huawei in their procurement of fixed network equipment.  ​

Juniper led the Market in 1H20 and 2019

DCI has a different meaning for different customers and vendors.  Ethernet DCI is a critical technology and enabler for Cloud customers to build data centers and transport data between them with lower-cost high-density router/switch platforms with pluggable modules.  While DCI has been around for a long time (The Optical Transport Market), Ethernet DCI is different. It uses Ethernet-based Routers and Switches for connectivity between data centers.  As we look forward in time, Ethernet DCI will also embrace ZR/ZR+ optics to increase distances in the 400 Gbps and 800 Gbps upgrade cycles. Historically DCI meant routing traffic through Telco SPs.

Today, the Cloud uses its own network and fiber for the majority of traffic until the last-mile to the consumer or enterprise.  As an enabler technology, Ethernet DCI is not only the movement of Ethernet platforms into adjacent markets, like Metro Optical Transport, but also new greenfield installations. The ability to move into adjacent markets and new opportunities creates a multi-billion dollar opportunity.  It is one of the main drivers for Ethernet-based Switch and Router revenue growth in the Cloud with the 400 and 800 Gbps upgrade cycle. Without this class of system and new optics, the Cloud could not scale, and edge-computing, IoT, and other more modern applications like AI and ML would not be possible.

When we look at 1H20 and 2019 results for Ethernet DCI, Juniper held the number one position in the market with Cisco and Arista rounding out the top three vendors in this segment.  Our reporting of Ethernet DCI looks at five different use cases, ranging from Cloud to Colocation to Telco SP.  In addition to leading the overall market, our report indicates Juniper also leads in the Cloud/Metro, Colocation/Long Haul, and Telco Cloud use cases  with the company’s MX, PTX, and QFX 10K platforms.

In 650 Group's market projections, we expect both next-generation high-density routing platforms and Ethernet Switch platforms to have robust growth.  Short-term growth will be driven by strong trends in Content Delivery Networks (CDN) and increased capacity to support Work-From-Home (WFH).  As we get into 2021, ZR optics availability will drive additional capacity growth with entering the market in the later half of our forecast.  ZR+ allowing Ethernet-based platforms breaking the 1000 km distance.  ZR+, under the right conditions (data rate, modulation, and fiber), has the potential to fulfill most connections on each continent.  As Telco SPs look towards Cloud architectures and machine-to-machine traffic rapidly goes from inside the data center to spanning multiple facilities, Ethernet DCI will remain a robust market for edge-computing connectivity and the transport of data sets for processing for AI.

Ericsson has served the mobile service provider industry well over the years.  Most devices connected to its customers’ networks are mobile phones; this, however, is changing.  Internet of Things (IoT) devices are entering the fray and provide an avenue for growth, as is the enterprise market.  Additionally, Ericsson’s channels have mostly been to operators, at a time when enterprise growth is expected to provide additional cellular industry growth.  Ericsson’s portfolio, until the Cradlepoint acquisition, was not particularly well-positioned to benefit from IoT and enterprise growth vectors. 
 
IoT devices come in all shapes and sizes, and they use a number of different connectivity methods, from cellular to Wi-Fi to Bluetooth to LoRa and many others.  In 2020, we expect only 16% of IoT and wirelessly connected devices will connect to cellular systems; the rest connect to more popular (and mostly free) connectivity types.   We see cellular connections growing in the future, but as a percentage of all IoT and wirelessly connected devices, we expect it will drop to 13% of all such devices five years from now.  The reduction in the fraction of IoT and wireless devices connected to cellular is why the “cellular to other” gateway market (Cradlepoint’s main market) makes sense.  There are some use cases where cellular backhaul connections to connect Wi-Fi, Bluetooth, Zigbee and others are vital.
 
With US-based CBRS and European nations’ private enterprise spectrum opening up the opportunity that enterprises will build their own networks – without needing a mobile operator’s help with sub-leasing licensed spectrum – the folks at Ericsson had a choice to make.  The choice was to continue selling to and through mobile operators and hope that mobile operators keep their share of enterprise and IoT growth, or to acquire products and distribution channels to access enterprise growth. 
 
Ericsson’s competitors were partnering with Cradlepoint with some success.  Recently, Nokia’s enterprise revenues hit about 10% of revenues, in part because it was selling LTE gear to customers in verticals such as utilities, mining & exploration, and logistics & shipping.  Many of these customers were using devices such as Cradlepoint’s.  Ericsson is now invited to these ongoing dialogues as these networks expand and change.
 
We would be remiss if we didn’t mention 5G in relation to Cradlepoint.  Some enterprises seek a secondary wireless connection to supplement their primary wired broadband connection.  Gear such as Cradlepoint routers can serve this need well.  In this sense, we can see why Ericsson uses messages such as “Ericsson accelerates 5G for Enterprise with the Cradlepoint acquisition.” 
 
This acquisition is not without controversy, in our view.  The Swedes are acquiring a company located in Boise, Idaho, and as such, managing from afar may present challenges.  Cradlepoint sells its devices differently (mainly through channels) from how Ericsson sells its gear (mainly direct); these two distribution methods may conflict.  Ericsson sold its cell phone business many years ago because it conflicted with its mobile infrastructure business.  Similarly, Cradlepoint gear is focused mainly on enterprises, we see a similar conflict because Cradlepoint’s customer base liked its independence from cellular gear-makers.  If Ericsson can manage through these challenges, it may enjoy exposure to IoT, enterprise and 5G gateway growth opportunities.