Juniper Networks announced plans to acquire Mist Systems for approximately $405M in cash. We think this deal makes sense for Juniper, who can now sell a key technology - WLAN - into its customer base of large and medium enterprises. Valuation of the deal probably fell a bit short of the expectations of some, but the vendor landscape has already seen significant consolidation between Ethernet Switch and Enterprise-class WLAN vendors, with now just a few potential buyers and sellers.
The companies just had a call to discuss the announcement and share the following messages:
We attended the Mobile World Congress last week in Barcelona along with an estimated 104,00 others from nearly every country in the world. We met with over 42 companies and nearly 200 people at the show and attended many press announcements. While most of the MWC19 headlines were about 5G, we were struck that much of the hyped growth will in fact be the result of deployments in enterprises and could be served using unlicensed (or lightly licensed) spectrum. Many of the presentations and product announcements suggested as much, if you read between the lines. We'll step through these two, enterprise and unlicensed next.
The Enterprise opportunity. A major theme we picked up at the Mobile World Congress show is simple: that for the mobile telecom market to grow, 5G must expand to the enterprise. We see ample evidence that without an expansion to the enterprise, the cellular market as we know it will likely experience declines as consumers expect more bandwidth for less in the future. The 5G narrative at the MWC19 show was straightforward: German & Chinese robots, trucks and drones need 5G to unlock the potential for future growth. There were robots, drones and trucks bleeping and whirring to make the point for visitors. We wouldn't argue with the contention that robots and very fast moving vehicles that are controlled remotely need very low latency; yet, there are so many use cases that don't actually need such low latencies.
Wireless is just a small part of "Enterprise." Enterprise 5G use cases being presented at MWC, including the wirelessly controlled robot, involved far more than just a wireless connection to succeed. To automate a workplace with robots, there is far more technology that has to be brought to market, including software, integration, wireline networking and the list goes on. None of these capabilities have traditionally been delivered by telecom equipment vendors; they have been delivered by vendors who have served the enterprise market (examples would be Cisco, IBM, Oracle, etc.).
Unlicensed Opportunity is Robust. In both the enterprise market and the outdoor market, unlicensed spectrum has tremendous potential. This goes for a) WiFi, which is already immensely popular, b) for in-building 'lightly licensed' CBRS (a US-only market), c) the soon-to-be released 6 Ghz spectrum, as well as d) outdoor mid-band spectrum like 5 Ghz (already very popular), e) outdoor 60 Ghz (like the kind relating to the Facebook Terragraph project) and f) 900 Mhz LoRa. While each of these unlicensed (or lightly licensed) frequencies was discussed at the show, 5G licensed was so overwhelmingly promoted it was hard for these exciting unlicensed markets to get any airtime. We think this lack coverage relatively speaking is a dis-service and we'll touch on just a few of them in this post.
Wi-Fi isn't going away. Related to the enterprise 5G topic, we found points and counterpoints about 5G versus WiFi interesting. Huawei's Enterprise group issued a press release about its 802.11ax (WiFi-6) expectations and how important WiFi is for the enterprise market. On the other hand, Huawei's telecom group was pursuing a press agenda about partnering with Operators to pursue the 5G market. Few companies on earth possess as broad a produt portfolio as Huawei, who has ample expertise, market share and credibility in both the mobile wireless market and the enterprise wireless market. We felt this dual-message (5g AND WiFi) was well-balanced. On the other hand, vendors and operators who have historically focused on cellular-only were pushing a "5G will displace WiFi" or at least a "5G is the only solution for mission critical enterprise" agenda. We feel that 5G-only in the enterprise message is to broad-based; we think 5G in the enterprise is far more nuanced because:
802.11ax/WiFi-6 is cellular-like. 802.11ax, which was launched commercially in 4Q18, incorporates many cellular-like capabilities. Many of the technical merits debates presented at MWC compared older 802.11ac WiFi against LTE and 5G NR. This is not a fair comparison because both 5G NR and 802.11ax actually began shipping commercially generally at the same time (4Q18 and 1Q19).
There is very little overlap between the Wi-Fi opportunity and that for cellular. The overlap in opportunities being discussed as the 5G enterprise opportunity at MWC have surprisingly little overlap with the vertical industries currently being served by Enterprise-class WiFi. Take manufacturing, which represents 9% of the Enterprise WLAN market by units in 4Q18. Or the outdoor WLAN market, which is only 3% of total Enterprise-class market in 4Q18 by shipments. The point is, there is very little overlap between the Enterprise WLAN market and the 5G enterprise market being discussed at MWC.
LTE will be the workhorse for many years. Additionally, let's consider the fact that many of the use-cases being discussed at MWC will initially be served by LTE, not 5G. In the enterprise market, the use of LTE in unlicensed (or lightly licensed, like the US's CBRS) bands is often called private LTE. The main difference between unlicensed LTE and licensed LTE is that with unlicensed, the enterprise can work directly with enterprise-focused VARs, resllers, solutions providers and complementary equipment suppliers, while with licensed LTE, the enterprise will need to work directly with its local mobile service provider who owns the spectrum, likely ensuring that the operators becomes the prime integrator of the project, or at least part of it. Private LTE will therefore have fewer parties involved (no operator), lower monthly costs (no operator) and will likely get the project to completion faster (fewer parties and a prime vendor/contractor/solutions-provider with expertise in the enterprise's vertical market). So, why not consider unlicensed/lightly-licensed LTE instead of licensed 5G to achieve the goals illustrated in many of the 5G use cases at MWC?
Where will WiFi lose out? If it has wheels or wings on it, Wi-Fi is not your friend - look to cellular.
To conclude, yes, 5G will fit some very exciting use-cases, especially those for low-latency applications. These are indeed exciting and deserve attention. We see it this way for the wireless industry: if the things involved have wheels or wings, or are of such high value that you must use cellular, there's a good chance LTE will cut it. And next, it makes sense to consider using unlicensed spectrum - which is just emerging as viable for many uses.
Today I attended the Extreme Analyst day at the NASDAQ in New York.
Extreme’s 4Q18 switch revenue grew over 10% and in our preliminary view of 4Q18, it took share. The company highlighted over 30,000 customers and over 6,000 partners in a one-Extreme approach that has integrated the acquisitions of Avaya and Brocade.
The company also highlighted that in 4Q18 it saw nearly 20 deals over $1M which is indicative of a rebound in its' business from large enterprises. We believe the company is maintaining a good portion of its' Extreme and Avaya installed based.
Extreme emphasized software as a driver for higher margin sales. We agree, software is the general direction of where campus switching is going with vendors looking to get incremental revenue from software instead of hardware. We have maintained for over two years now that campus switching would be a positive growth market led by software to help manage a more converged (Unified Access) market. We also see IoT and the inclusion of securing and monitoring IoT traffic as an additional growth drive for the campus market.
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.
Western Digital Corporation, also known as WDC, held its investor meeting yesterday. We highlight four important disclosures: (a) it expects HDD to survive, despite flash's advantages, (b) WDC's plans to use RISC and launch a new memory interface, (c) an update on current business trends, and (d) the company's plans for its storage systems business.
First, since the company owns both Hard Disk Drive (HDD) and Flash divisions, it has an interest in keeping investors informed of the relative competitiveness between the two. Two and a half years ago, WDC closed on its acquisition of flash pioneer Sandisk. Around that time, the company was asserting that there is, and the company anticipates it will remain the case, that HDDs will retain at least a 10-times advantage versus flash on a cost per bit ($/GB) stored basis. At the company's meeting yesterday the company reiterated its view that this 10x advantage will continue at least till the year 2022.
The 10x $/GB differential is important because, if true, it means HDDs will not go away for many applications, especially for storage of big data at hyperscalers. Consider this - storage systems vendors such as Pure Storage are announcing software systems that allow premises-based flash storage to be seamlessly moved to the cloud for longer-term storage, which means that cloud hyperscalers like Amazon Web Services (AWS) are likely to be HDD customers for a very long time. Nevertheless, flash will keep on taking share from HDD. The company has been reducing its manufacturing capacity for HDD, with significant layoffs and factory shutdowns over the past several years. In fact, it plans significant ongoing cost cutting in its HDD manufacturing, it the range of 15-25% Y/Y decline next year.
The company also announced an ambitious plan to transition from licensed CPU cores to RISC based cores, for which it expects to pay no licensing and/or royalty fees. WDC says it ships over 1 billion CPU cores per year, so this is a significant shift. Also, the company plans to introduce an open-sourced memory interface called OmniXtend memory fabric, which will pit it against Intel (using DDR4, etc.) who has historically launched its own interfaces. WDC is now a very big player in storage, having built through organic growth and acquisitions. It has more market might and these new initiatives have a better opportunity to launch than in the past.
Additionally, the company said that its near-term business trends are under pressure due to cyclical market fluctuations. The memory semiconductor industry has historically endured a boom/bust cycle and now the company is explaining it has entered the bust part of that cycle. Since its earnings call on October 25, 2018, it says conditions have deteriorated somewhat more, partly the result of hyperscalers continuing to reduce inventories and partly due to mobile phone companies still reducing forecasts of demand. The company expects 2019 will see flash demand below the historical range and that hyperscalers should see a return to growth in 2H19.
Lastly, the company's Data Center Solutions group, which employs a vertically integrated strategy to compete with traditional storage systems companies such as DELL-EMC, NetApp, HPE, Pure Storage and others, just experienced a record quarter on a revenue basis and is approaching break-even in its operations. The company has the goal of becoming a top 5 player in data center solutions, which we take to mean, it is planning to take share from the current players. The group has experienced 17x revenue growth from Q1FY19 compared to Q1FY16, according the presentation (of course, the group has made acquisitions that bolster this number), has shipped 3 Exabytes in the months in calendar 2018 (which isn't over yet) and has shipped 8,500 systems and platforms since inception. The company plans to experience "double digit" revenue growth rates for this unit in the future.
On November 13, 2018, Cisco announced its new Catalyst 9800 Wireless Controller. With this announcement, Cisco now enables large enterprises to manage their WLAN networks from the cloud.
This announcement has several components to it that are interesting.
What's new here is that Cisco customers can control their WLAN networks using public cloud - in particular Amazon Web Services. Up till now, the Cisco Aironet product set has been enabled to run on Controllers, as a virtual software instance on premise, or in "controller-less' capability, called Mobility Express.
Why is this important? Because Meraki (owned by Cisco) operates a very successful cloud-managed WLAN service, enabling management of Meraki Access Points. The larger revenue contributor to Cisco's WLAN revenue is its Aironet product line, which hasn't been cloud-manageable until this 9800 announcement. With the introduction of the 9800 cloud-managed offering, this enables large-enterprises to operate their wireless networks from the cloud. So, Meraki isn't Cisco's only web-managed offering any longer. We think over time, Cisco customers may see the distinction between cloud-managed and premise-located management as blurring.
Our big takeaway from its recent global analyst meeting was that Nokia is formalizing its enterprise business. Of course, the company’s primary business, which focuses on telecom service providers, is undergoing major product updates, including towards 5G, Fixed Wireless Access and towards network slicing. We have published about these topics in other posts relating to Nokia in the past several months, having attended other Nokia events, so we focus on topics we haven’t discussed recently.
The company acknowledges that telco capex is expected to be unexciting and is redoubling efforts to gather enterprise customers. In 3Q18, Enterprise represented 5% of revenues. The company expects 8% CAGR for Enterprise Networking. Of course, the company covered many topics beyond enterprise, including its view on megatrends, the importance of spectrum instead of differentiation between 4G and 5G, residential WiFi and Fixed Wireless Access, its recent wins at major telcos, the impact of the recent re-organization, the impact of the trade war and other topics.
Enterprise market, Private cellular and WiFi. The company’s view is that private LTE will challenge WiFi for certain applications in its “strategic” enterprise markets, including for verticals such as logistics and transportation. Considering the Nokia view, we expect private LTE and WiFi will co-exist in the future. We think that Nokia can succeed with its private LTE strategy, because this is mostly a “greenfield” opportunity. Many of the cases Nokia explains it is seeing success are outdoor, not indoor, where WiFi is so popular. A number of industries are likely to adopt private LTE (mining, logistics are good examples), and later 5G, but we expect most every industry will maintain their reliance on WiFi. We keep in mind that in light of the fact that 802.11ax (which began shipping 3Q18) incorporates many more cellular-like capabilities, WiFi will have a seat at the table for some time to come even in these critical industries. Interestingly, by leveraging service provider channels, the company has plans to enter the “branch” enterprise network market, using SD-WAN as its “Trojan horse” to enter.
Megatrends. From a strategy standpoint, Nokia sees megatrends: Ubiquitous connectivity, multi-cloud, deep analytics, industrial IoT and regulatory.
Spectrum takes on new importance. On mobile radio, the company focuses on spectrum differences as much as the difference between 4G and 5G. The company’s view is all macro basestations should have mmWave. Describing its 5G ramp, Nokia’s factory capacity related to 5G infrastructure has quadrupled this most recent quarter; and the company “went to volume shipments” on its new, in-house Reefshark chips in 3Q18.
Residential WiFi and Fixed Wireless Access. The company’s new mesh WiFi will be made available at its first service provider customer’s stores in the month of November. This mesh technology is from the recent acquisition of Unium. The company’s first Fixed Wireless Access (FWA) customers have begun deployments, for both 4G cellular and WiGig (60 Ghz 802.11ad). We understand that the 4G cellular projects are largely at mobile service providers working to leverage existing investments in their mobile infrastructure, while WiGig is in demand at enterprises and traditionally fixed-line service providers. The company expects 5G FWA infrastructure will be ready to ship in 2019.
Recent wins at service providers. New wins announced €2B around this event include “frame wins” at major Chinese service providers
The impact of the recent re-organization. On the day of its recent earnings call, the company announced a planned re-organization, along with some reductions in force, to reduce spending so the company can hit its year 2020 financial targets. The importance of this re-org, from our standpoint, is that the Software division of the company will be in charge of managing several products that used to be part of the Mobile division beginning Jan 1, 2019. Products moving from Mobile to Software include IMS CSCF and TAS. We have verified that Packet Core (including EPC/4G and 5G Core) will remain in the ION (IP and Optical Networks) division, where it has been for years.
Trade war. According to Rajeev Suri, CEO of Nokia, Australia, UK, Korea, Japan, possibly Canada all may ban Chinese telecom gear. Suri expects that Nokia’s “working assumptions” are that: (a) around 20-25% Chinese market share is available for foreign vendors, and (b) potentially, ZTE will take more share in China, and that (c) foreigners (like Nokia) will still be able to play. Suri explained that Nokia hasn’t seen Chinese vendors get more aggressive in Middle East and Africa (MEA).
At Mavenir’s analyst meeting in Dallas today, the company stated that it expects to grow its revenues about 10% Y/Y in 2018. In arriving at this revenue, it is pursuing a price-aggressor strategy to some extent and has a surprisingly broad portfolio of telecom-focused products. Its product line is software-oriented, though the company does still have hardware development on an ongoing basis. Using 5G as its ‘insertion point,’ the company is working on a strategy to get 10-15 large, Tier 1 mobile network operators at the tens-of-millions per year level. The company’s portfolio encompasses voice core, messaging core, mobile packet core and radio access networks. What is really interesting is that Mavenir expects to expand past its traditional revenue stream (telecom core and messaging) into the radio market, with revenues coming in 2019.
In its traditional telecom core market, the company suggested that some of its customer wins are with Tier 1 mobile network operators across its product portfolio, including IMS/VoLTE, EPC/5GCore, Security and advertising messaging. To illustrate its success in selling a differentiated Telecom Core portfolio, it shared subscriber statistics that its operator customers who use Mavenir core system such as IMS TAS, CSCF and RCS application servers (mostly supporting VoLTE, and secondarily RCS):
In its new market, RAN, this is exciting – Mavenir is a new entrant to the RAN market, and it is US-based. The company expects that it will have Radio Access Network (RAN) revenue in 2019 after successful completion of trials now underway. For reference, the company’s RAN systems generally follow open standards such as xRAN and can be considered “cloud RAN.”
Mid-band spectrum shortages in the US was the main thrust of the 5G Americas sponsors. The idea is that the rest of the world has lots of mid-band spectrum available and service providers in countries that could be considered economic leaders (Japan, Korea, China, Western European countries) have plenty of available mid-band spectrum that is ideal for 5G, while the US does not. This group at 5G Americas, which includes service providers, vendors and standards bodies, is saying that US leadership in cellular infrastructure and the entire app economy that relies upon it may be at risk as 5G get deployed.
Other topics discussed: AT&T is currently out for bid on its 5GC infrastructure, and this caused some interesting posturing by the vendor attendees (like Ericsson, Nokia, Cisco, Mavenir) at this conference, with each trying to identifying their strengths. It seems the consensus is that all mobile operators in the US market are using Option 3X, an EPC anchoring system. And, the consensus seems to be that US operators will need to move to 5GC once most traffic is coming over 5G Radio (“New Radio”). Vendor selection appears an open field, once again, as 5GC has 13 different microservices, each which could theoretically be parsed out to different vendors. Operators are saying, though, that while this multi-vendor selection may lead to savings on purchasing, it will increase integration spending, so these two have to be balanced out.
Mobile Edge Computing: The consensus is that a 50 mile radius (or others are saying 100 km) is considered the ‘edge,’ or the ‘low latency’ zone. We expect, however, that the data forwarding plane (‘user plane’) will be distributed to, say, 100 locations within a territory like the US market, while the control plane will be much more centralized (perhaps as centralized as it is currently, where it might be considered to be like 1/4th the number of locations).
CBRS. The consensus is that testing will be done by mid November 2018 and Initial Commercial Deployment by 1Q19, potentially spilling into 2Q19. PAL auctions are expected by attendees to be a 2019 event, with 2020 traffic running on PAL spectrum. Commscope represented the views from a SAS standpoint for this discussion.There were discussions about the C-Band (6 Ghz) potentially using the same type of Automatic Frequency Coordination system, but the consensus is that it is too early to declare that the path forward.
We attended Mobile World Congress Americas (MWCa) in Los Angeles, CA this week, as well as the AT&T Spark event in San Francisco. Since 5G is launching first the US, these two events became the public events where significant 5G-related announcements happened.
Additionally, discussions about spectrum in the US market were very active discussions. Some points we picked up on: