Threat of vendor consolidation looms as operators' 5G spending slows – Deloitte

A new report from Deloitte suggests that 5G's next phase might involve consolidation among vendors.

"The bulk of CSP [communications service provider] spending on 5G equipment and spectrum seems to be behind us, and there are few signs that the trend will reverse," the firm wrote in its new 2024 telecommunications industry outlook. "This has positive implications for CSPs that may have higher free cash flow as 5G build-out settles but has negative implications for the companies that make 5G wireless equipment. If annual revenues fall too far, the industry may see fewer vendors."

The Deloitte authors noted that each generation of mobile technology includes a spending rush by network operators: "Roughly once per decade, the global wireless industry has upgraded the entire ecosystem: 2G in 1992, 3G in 2001, 4G in 2010, and 5G in 2019. Each generational upgrade required mobile network operators (MNOs) to spend billions of dollars globally on RAN [radio access network] and spectrum."

But after all that spending, operators start looking for a return on their investment – a lull that can squeeze equipment suppliers.

"The companies that make RAN gear ... saw their revenues and profits grow rapidly during the adoption phase of each upgrade cycle – and then flatten or decline until the next generational upgrade occurred. In 2024, the industry will likely be in such an intergenerational trough," Deloitte wrote.

Indeed, that spending trough became quite clear in the US market and globally over the course of 2023. And in many cases, it was deeper than expected.

"So the back half of 2023, we did see a change relative to what we previously expected," Crown Castle's former CEO Jay Brown said during a quarterly conference call in July 2023.

The result was belt tightening and layoffs among vendors and the network operators that had hoped for a bigger 5G bump than they received. Indeed, that cost-cutting trend appears poised to continue into 2024, based on recent rumblings of layoffs at Cisco and Ericsson.

Next up: Consolidation?

In its report, Deloitte speculates that consolidation may be the next step.

"Each [spending] trough has seen vendor consolidation, and it seems likely that the 5G trough could lead to a similar outcome," the firm wrote. "However, with recent technology sanctions, many telecoms may have fewer choices for vendors offering wireless equipment. If there is further consolidation, there could be what amounts to a single vendor in some markets. In contrast, wireline markets (fiber, cable, etc.) have greater supply chain diversity and choice between vendors."

Already HPE has confirmed it will buy Juniper Networks in a $14 billion deal. But that transaction might have a bigger impact on the enterprise space rather than the telecom market.

Nonetheless, there are clearly fewer viable players in the US market now. Smaller vendors like Airspan and Parallel Wireless are facing struggles while giants like Ericsson strengthen their positions.

Both Airspan and Parallel have shed workers as their revenues dwindle. Meanwhile, Ericsson is now the prime supplier for AT&T and shares business only with Nokia (at T-Mobile) and Samsung (at Verizon) among bigger US network operators.

As a result, Sweden's biggest network equipment vendor now enjoys a dominant position in the US market, a situation US policymakers were trying to avoid when they moved to block China's Huawei – the world's biggest 5G equipment supplier – from American networks.

Questions over 6G and open RAN

Ericsson's dominant position in the US market would also appear at odds with the principles of open RAN. The technology promises to allow operators to mix and match vendors using open interfaces, which should prevent vendor lock-in.

"It is ... possible that growth in open RAN will see a proliferation and deepening of supply chain alternatives in the RAN market," Deloitte speculated. "Further, telecoms could use open RAN as a means of creating a more flexible and cost-efficient network infrastructure."

But the firm also acknowledged that it's still early days for open RAN and that forecasts call for the technology to account for just 15% of global RAN sales by 2027.

Another looming issue: 6G. "At this time, 6G has not even been defined (likely 2025-2028), and most analysts are not expecting a commercial launch until 2030 – with the full revenue ramp likely occurring in the following years," wrote the Deloitte authors.

Further, they noted that 5G-Advanced technologies are set to hit the market in the coming months and years. The 3GPP's 5G-Advanced Release 18 and 19 updates include support for technologies ranging from advanced MIMO to augmented and virtual reality.

Those advancements "may delay or even obviate a move to 6G in the next decade."

How such pressure might affect the 5G vendor landscape remain to be seen. It's also not clear whether regulators in the US or internationally would approve of further consolidation in an already constricted market.