The shift from the traditional radio access network (RAN) architecture, using proprietary hardware and interfaces, toward virtualized (V-RAN) architectures with vendor-neutral hardware and software and open interfaces is gaining momentum. With the 2019 reporting cycle and virtual MWC wrapping up, the timing is right to review the why, where, and when -- why there is a transition, where are we in the transition, and when will the transition move the needle.
There are multiple on-going open RAN, O-RAN, and virtual RAN initiatives driven both by operators and suppliers with the primary objective of changing the competitive dynamics, spurring innovation, improving agility, and optimizing total cost of ownership (TCO).
From an operator perspective, the goals are generally fairly well aligned, although for some operators the focus might be geared more toward the supply-side related benefits, while others might put more emphasis on demand-side opportunities.
One of the key drivers with the shift from proprietary RAN toward V-RAN and open RAN is that it should ideally address the competitive landscape and increase the likelihood of a market concentration trend reversal. Per Dell’Oro Group estimates, the worldwide Herfindahl-Hirschman Index (HHI) has advanced nearly 50% over the past 18 years. Preliminary estimates suggest the HHI index for the 2019 RAN market topped 4000 in both North America and China, reflecting the state of the competitive dynamics in these highly concentrated markets.
The pace of innovation in the mobile infrastructure industry is developing at impressive speeds, even so, for some it is still not enough. We have spoken with multiple key players both on the supply and the demand side: they envision more open, virtualized, and multi-vendor networks would not just alter the competitive dynamics but also unleash innovation and improve the likelihood of identifying the next game changer.
Initially the value proposition of these next generation architectures was heavily weighted toward the TCO benefits of using open interfaces, sharing resources, mixing and matching baseband and radio, and utilizing more general purpose processors. While maximizing TCO still remains extremely important in an environment in which constrained operator revenue growth is expected to be one of the primary inhibitors of further telco capex acceleration, there are some preliminary signs that this is no longer the leading driver, underpinning assumptions that the RAN comprises a relatively small portion of the overall site TCO. Or as Hans Vestberg put it during Verizon’s February Investor Update -- the RAN portion is peanuts relative to the overall costs.
Even though I have difficulty recalling Mr. Vestberg using the peanut term to characterize the RAN market when he was the Ericsson CEO, his points are valid and a timely reminder that the radio is just one piece of the puzzle. Though if indeed TIP’s Evenstar project can deliver $1000 RRH units over the near-term, clearly it could be a compelling piece of the puzzle. And as some of the early service provider adopters have pointed out, virtualization could introduce some synergies with the non-RAN components as well.
When it comes to the current state of the V-RAN and open RAN technologies, our preliminary estimates suggest V-RAN and open RAN revenues improved sequentially between 3Q19 and 4Q19 and accounted for less than 0.3% of the full-year 2019 RAN market. At the same time, the momentum is moving in the right direction as the ecosystem develops, partnerships are forming, suppliers are ramping up investments, and operators are committing and experimenting with trials.
As we look forward, we forecast virtualization will gradually play an increasingly important role in the RAN. But we also envision the road will not always be smooth and the business case and adoption timing will be dependent on a confluence of factors including the state of the existing assets, the overall TCO, the performance per watt per dollar differences between custom silicon and general purpose processors, and the geopolitical climate, among other things.
I have tracked the RAN market closely for 10 years now and seen how unrealistic business plans and expectations have failed to separate the hype from reality with multiple technology transitions resulting in missed opportunities. This transition does not have to be a repeat, even if it will take some time before virtualization in the RAN will move above the noise and approach a tangible portion of the overall RAN market. In other words, with realistic expectations and business plans, the opportunities could be real for both the incumbents and new entrants.