Business dynamics remain healthy
Despite headwinds from so-called cord cutting because of the increasing consumption of online video content and attrition from myriad and growing SVOD and other online video competitors, cable operators had a good year in 2019 as growth in the broadband business continues unabated, and business services become a major contributor to revenue. In fact, the stocks of the two largest MSOs Comcast and Charter, posted sequentially 60% and 25% growth through December 2019 (albeit in a buoyant stock market).
According to a recent report by analyst firm MoffettNathanson, cable operators are projected to continue to grow their broadband business for the foreseeable future, grabbing more share from the telcos. At the same time, business services remain a healthy and growing revenue contributor, and the more innovative MSOs have created vibrant business offerings with services such as SD-WAN to the SMB market. Comcast’s revenue from business services was 13.4% of cable revenue for the nine months ending September 30, 2019.
It is true that there are rumblings in the industry about the potential competitive threat from 5G in the form of fixed wireless access; although 5G might over the long term become competitive with cable both in the forms of wireless broadband substitution and fixed wireless access, the state of the technology and cost parameters do not make such solutions economically viable in the near term, and furthermore, cable may indeed reap economic value from 5G (more on this later).
Software-based solutions will gain field traction
Although it is true that 2019 through end of September was not a good year for CCAP vendors in aggregate, with the nine months revenue declining about 30% over the same period in 2018, a closer examination of the revenue make-up tells a different story. The revenue of vendors whose solutions are primarily hardware-based declined about 33% in that period; vendors with software-based solutions saw about 11% in revenue growth, with 41% revenue increasing in the third quarter. Although it is true that some operators slowed down capital investments as their DOCSIS 3.1 rollouts tapered off and as they deployed already purchased equipment, but as they look ahead, many operators are also assessing whether their traditional playbook will continue to sustain their future growth and competitiveness or if they should explore more forward looking alternatives. 2020 will see more meaningful growth in deployments of software-based solutions, particularly as more solutions come in the market. Looking back, 2019 may have been a transition year.
Remote-PHY, Remote-MACPHY or Remote-X
It is unquestionable that the distributed access architecture (DAA) has been getting some traction, led by Comcast’s public commitment to Remote-PHY. This technology, based on the CableLabs specifications issued in 2015, has gained a beachhead over its cousin, Remote-MACPHY, whose spec is under development at CableLabs. Although some operators and vendors have settled on an architecture, there is a growing trend toward flexibility with vendors offering the option to locate the MAC either centrally or on a remove device. DAA will get more traction in 2020, as deployments are now real, and the new technologies are field proven and showing clear benefits.
DOCSIS 4.0 will inch closer to reality
CableLabs is expected to issue the DOCSIS 4.0 specifications, which include Full Duplex DOCSIS (FDX) and Extended Spectrum DOCSIS (ESD), for spectrum up to 1.8GHz to enable symmetrical upstream and downstream bandwidth. This will help the vendor community chart its way forward on meeting the need for significantly increased upstream bandwidth. Deployments of this technology are well beyond 2020.
Cable operators will continue to generate an increasing share of their revenue from lucrative business services. Having established a beachhead in the SMB market where they have a natural affinity, they are putting more emphasis on the middle market and the enterprise market. SD-WAN is a particular area of promise for cable operator. Comcast, which entered this market early and aggressively, will continue to grow its momentum. Other operators have started their deployments and will grow from there. Other promising services include WIFI and security.
5G will progressively materialize as an opportunity for MSOs
It is undeniable that cable operators have become a force to be reckoned with in wireless, largely through their MVNO based service offering. However, it is also well understood that a business largely built on reselling a competitor’s service is not the best way to create long-term value, and indeed MSOs have been exploring a number of alternative business models. Charter has made no secret of its plans to use CBRS to supplement its HFC reach in some areas and may well introduce this solution in 2020. An even more intriguing opportunity is the use the extensive HFC network to backhaul 5G traffic. 5G will require a dense infrastructure of small cells; the cable HFC network, with assets and power in the local access network, may prove to have the right infrastructure for the 5G small cells backhaul. This said, 5G will require very low latency, which today’s DOCSIS technology cannot provide but a new industry effort, Low Latency X-Haul (LLX), is striving to resolve this limitation. Much progress will be made on this front in 2020, potentially setting the stage for an exciting opportunity for MSOs for years to come as 5G becomes a market reality.
Liliane Offredo-Zreik (@offredo) is principal analyst at ACG Research.