Today, Amazon announced that it will acquire eero, a consumer mesh WiFi equipment company that as of 3Q18 had 13% revenue share. In 3Q18, the consumer mesh WiFi market measured just over $150M, which was up just over 34% Y/Y. The number one player by revenue was NETGEAR in 3Q18, followed very closely by Google, who had retained the number one spot for the 5 quarters before 3Q18. Now, with Amazon's acquisition of eero, just three players will have well over 3/4th of the consumer mesh WiFi market. What's interesting here is that two Internet titans, Google and Amazon, are attempting to disrupt the consumer networking market that up till 2015 was dominated by hardware players such as NETGEAR, Linksys, TP-Link, D-Link (consumer WiFi vendors) and adjacent players such as Technicolor, Arris, Huawei, ZTE and Nokia (Broadband Customer Premises Equipment vendors).
So, what does it mean that now both Amazon and Google are battling for primacy in the home networking market?
It is complementary to their interactive speaker business. Both Amazon and Google have introduced various hardware products for the home, but most successful have been both of their interactive speaker products, which for Amazon has been the Echo and Dot and for Google Home. These speakers are generally in an "always-on" mode, which allow them to listen to all sounds nearby, and which also means they are generally always connected to the WiFi devices in the home. By always being connected, these speakers consume much of the available WiFi bandwidth in the home, deteriorating the available spectrum for other devices. One obvious solution, which is being made available by wireless chip giant, Qualcomm, is to integrate WiFi chips with speaker chips. That's the direction that both Amazon and Google may pursue - to integrate Home with Google WiFi and Echo with eero. This will mean that multiple WiFi mesh devices will also represent multiple interactive speakers in the home, all while combating the over-use of WiFi spectrum in the home.
These Internet giants can, and probably will, attempt to overwhelm the market with low prices, subsidized by primary businesses. We already see that Google's price for a 3-pack is 37% lower than eero's comparable system. Our working theory is that Google has been selling close to no margin and that eero has been experiencing a 30's percent margin. This is probably not good news for the following companies who either do have gross margins above 30% or we assume do, like NETGEAR, TP-Link, D-Link, and others mentioned above.
We attended the Nokia analyst meeting for its Fixed Access business, where the company explained its priorities for the upcoming year. these include: (a) an expansion to its In-Home WiFi focus, (b) an aggressive push to move all but physical layer functions into the Cloud, and (c) the launch of fixed broadband wireless. Last year's priorities included a push into the Cable broadband market (through the acquisition of Gainspeed) and Internet of Things (IoT). The business leaders seem to be focused on what we'd consider to be the current trends in broadband, and Nokia is taking advantage of the competitive environment as the broadband market is consolidating around a shrinking number of players.
In-Home WiFi. While some of the the company's Passive Optical Network (PON) Optical Network Terminals (ONTs) are currently shipping with Wi-Fi capabilities, it represents a growing trend among operators to offer a full function gateway. The company plans to enhance its In-Home WiFi capabilities to entice its Service Provider customers to purchase these slightly more expensive devices. The company ships something on the order of 3 million ONTs each quarter, generally on par with the number of in-home WiFi devices sold by one of the leaders of in-home WiFi, Netgear. There has been a long-running trend whereby cable modems and DSL modems have incorporated WiFi, which has reduced the market opportunity for stand-alone WiFi routers, mainly in North America and European markets (where cable and DSL are popular). However, where PON is popular, like in Asian countries (China included), PON modems have generally not incorporated WiFi until recently and WiFi capable ONTs represent a small fraction of all ONTs that ship. Nokia plans to introduce a solution that extends and enhances WiFi beyond the gateway at some point - we've seen WiFi Extenders and now WiFi mesh experience significant growth in recent years. What Nokia may be able to bring to the table, though, is WiFi extending products with deeper integration to the Service Provider operations. This is a capability that will likely be embraced by operators in order to reduce the number of customer service calls to the operators themselves. We have seen vendors like Arris make similar pronouncements of enhancing their WiFi strategies to include devices such as Extenders (but mainly for cable and DSL), so Nokia is not alone in being a broadband modem vendor recognizing the 'whole home' trend. From a consumer WiFi perspective, Nokia's move to enhance its WiFi capabilities will put most pressure on standalone WiFi vendors that sell to Asian countries - these include D-Link, TP-Link, Buffalo, and Zyxel.
Broadband to the Cloud. The Network Functions Virtualization (NFV) trend has now hit full steam, with nearly all mobile operator RFPs requiring vendors to offer software-based functions such as EPC, routing, IMS and other functions that can be run in so-called "Telco Clouds." The broadband group at Nokia is expected over time to deliver on a portfolio that, where possible, will be running on these server-based environments. We, similar to Nokia's expectation, expect that most fixed broadband "NFV" systems will be run in separate "clouds" from the mobile "clouds" for the next few years.
Fixed Wireless. We've all heard a lot about fixed wireless broadband trials at telcos in recent months. Yesterday, for instance, AT&T announced an expansion of its trials. Nokia will deliver on Fixed Wireless through its Fixed Broadband business group, an organizational acknowledgment that this is quite different from mobile wireless and will more likely be used to augment wired broadband strategies in difficult-to-reach locations. Generally, Nokia's view is that fixed wireless is relatively more expensive than many wired broadband systems - we share this view. It is hard not to be somewhat skeptical about fixed broadband wireless given the failed attempts to bring it to market going back as far as the early 1990's (AT&T's Project Angel), and then MMDS and LMDS efforts in the early 2000's, and of course WiMAX (more recently). Nonetheless, Nokia is smartly positioning its plans to support fixed wireless as a way to augment wired broadband. And, we know that fixed wireless works - Ubiquiti Networks has shipped tens of millions of fixed broadband wireless links to its customer base of Wireless Internet Service Providers (WISPs).