What’s The Outlook For The Wireless Infrastructure Market?

by Trefis Team
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The mobile infrastructure market has been facing headwinds in recent years, amid a slowdown in capital expenditures by wireless carriers and a more intense competitive landscape. The wireless equipment market declined by around 10% last year, and it’s likely that it could shrink by high-single digits over this year as well, impacting the revenue and profitability of major players such as Ericsson (NASDAQ:ERIC) and Nokia (NYSE:NOK). In this note, we take a look at some of the factors impacting the wireless market and what lies ahead.

See our complete analysis for Ericsson and Nokia

Saturation In 4G LTE Space, Higher Competition 

The market for wireless network equipment is cyclical, as industry revenues are dependent not only on wireless carriers upgrading from one generation of wireless technology to the next, but also on the boom and bust cycles of the global economy. At present, wireless players in most developed parts of the world have completed their transition from 3G technologies to 4G LTE. While there remains some scope for transition in emerging markets, economic and competitive pressures have resulted in a slowdown in investments. For instance, the new entrants in the Indian telecom market have driven down ARPUs and overall service revenues for telecom carriers, potentially impacting their ability to fund CapEx outlays in the medium-term. Russia and the Middle East, on the other hand, have been facing economic pressures amid weaker commodity prices. IHS projects that the LTE market will decline at a CAGR of (12.4%) from 2016 to 2021, with LTE-based revenues declining from a peak of around $26 billion in 2015 to just about $12 billion by 2021.

The industry is undergoing changes on the supply side as well. The networking equipment market is becoming increasingly commoditized, amid increasing standardization of core network components, and players are turning to software for product differentiation. This is making it harder for companies such as Ericsson and Nokia to distinguish their equipment from Chinese players such as ZTE and Huawei, who have been gaining market share by leveraging their low-cost hardware and attractive credit terms. The Chinese companies also have access to low-cost loans from state-backed banks.

Opportunities: Small Cells, 5G

That said, there are pockets of growth in the market. For instance, the concept of small cells is gaining traction, as carriers look to improve their network coverage and capacity in densely populated areas where traffic is high, without having to significantly increase capital expenditures. These cells typically offer coverage of several hundred meters, unlike macro cells which cover several miles. The growing consumer demand for higher Internet bandwidth, driven by the popularity of high-definition video streaming could also prove to be a driver for networking companies, as they roll out faster versions of LTE, such as LTE-Advanced via hardware and software updates.

The next generation 5G technology standard – which could provide Internet speeds that are potentially as much as 40x higher than 4G –  is touted to drive the next big investment cycle for telecom carriers. The standard will operate on the so-called millimeter spectrum, which requires more base stations to provide the same level of coverage as 4G, implying that capital expenditures could be comparatively higher.  That said, the ramp-up in revenues could take some time. For instance, Ericsson has indicated that its 5G revenue opportunities could increase from 2019 onwards and IHS predicts that the global 5G infrastructure market will become a $20 billion-plus market by 2020.

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