Global Webscale Network Operators Market Review Q2, 2020: COVID-19 Fails to Slow Webscale - Annualized Revenues Top $1.5 Trillion in 2Q20 as Capex Reaches All-Time High
DUBLIN, Oct. 15, 2020 /PRNewswire/ -- The "Webscale Network Operators: 2Q20 Market Review" report has been added to ResearchAndMarkets.com's offering.
Shrugging off COVID-19 concerns, the webscale sector witnessed yet another strong quarter in 2Q20 aided by continued investments in network infrastructure.
The network spending of big webscalers is centered around immense, hyperscale data centers and undersea cable systems that support network traffic from the tech companies' online retail, video, and social media platforms, along with cloud services. Webscale network operators (WNOs) may also own access networks, typically using fiber, microwave or mmWave, and even fixed satellite. WNOs exploring outer space for providing connectivity include Amazon, Apple, Alphabet, Facebook, and Microsoft.
A broad set of vendors are benefiting from WNO Capex spending - from semiconductor players selling into the data center market (Intel, AMD, Nvidia, Broadcom, etc), to optical components & transport vendors selling into data center interconnect markets (Ciena, Infinera, Neophotonics, Lumentum, etc.), to contract manufacturers of white box/OCP servers (Wistron and Quanta).
Infrastructure upgrades continue to drive Capex, while R&D growth experiences a slowdown
Capex spend saw a sequential surge of more than 20%, posting 20.4% YoY growth in 2Q20 (25% YoY growth in 1Q20). A portion of this strong growth in the first two quarters could also be attributed to a lower base in the corresponding quarters of the prior year, considering falloffs in three out of four quarters in 2019, which included double-digit declines of 17.5% and 11.4% during 1Q19 and 2Q19, respectively.
Growth in R&D investments, though, slowed down to post 12.3% YoY growth in 2Q20 (vs. 15.1% in 1Q20), and unlike Capex growth, it failed to track near pre-COVID levels (18.6% YoY growth in 4Q19). On an annualized basis, these investments clocked 16.0% YoY growth to post $164.8B for the 12 months ended June 2020.
Spending and investment trends by key operators
A sub-group of important WNOs, the Top 8, continues to be important for tracking the sector. This group includes Alibaba, Alphabet, Amazon, Apple, Baidu, Facebook, Microsoft, and Tencent. Four of these accounted for at least 10% of total WNO Capex in the twelve-month period ending June 2020 - all based in the US: Alphabet, Amazon, Facebook, and Microsoft. Half of the Top 8 WNOs - Alphabet, Apple, Facebook, and Baidu - spent less on Capex in 2Q20 than in 2Q19.
With respect to R&D spending, webscale operators continued spending more on R&D than Capex; annualized R&D/revenues were 10.7% in 2Q20, ahead of the Capex/revenues ratio of 7.4%. Webscale operators are plowing R&D funds into a broad range of tech projects, in both predictable areas like artificial intelligence and IoT, and less obvious areas like healthcare (Amazon and Google), food delivery (Alibaba), and connected cars/self-driving (Baidu). Many webscale operators are designing their own chips now, in potential competition with current suppliers; the publisher's Webscale Playbook series details these efforts.
M&A activity in the sector posted a strong performance in the twelve-months ending 2Q20, with Alphabet, Amazon, Microsoft, and HPE each recording sizable MA costs. However, IBM's $34B acquisition of Red Hat stole the show during the twelve-month period. Webscale operators are also beginning to more actively partner with telcos on network projects, with Facebook's $5.7B splash on a stake purchase in Jio Platforms. Microsoft is also leading the way with recent big wins at AT&T and Jio in India. IBM, already a big supplier in the telco segment, will use its Red Hat acquisition to further these aspirations.
Going forward, spending growth will be tested by demand volatility and supply chain constraints
The current pandemic situation has somewhat proved to be a silver lining for large WNOs with strong and sizeable cloud businesses and offerings, as lockdown measures across major economies have resulted in a spike of remote access to cloud-based tools and services. However, they are also faced with two key obstacles:
From the operators' point of view, WNOs with significant dependence on non-cloud' businesses and relatively smaller players will likely restrict their spend on webscale buildouts/data centers in 2H20 - as seen with Apple and Facebook. They must prepare to counter the effects of supply chain and workforce disruptions until the pandemic subsides considerably. While both the quarters in the first half of the year saw Capex growth surging above 20% YoY, overall, it is unlikely to sustain into the rest of the year and is expected to be in the 8-15% range.
The 2Q20 WNO Market Review analyzes the network infrastructure spending and financial position of webscale network operators (WNOs).
WNOs are web-centric companies who own and operate large multi-country communications networks based upon hyperscale data centers and submarine cables. Webscale operators may also own access networks, typically using fixed satellite or fiber. WNOs own network assets in order to support their core businesses, which comprise digital advertising, online retail, cloud, digital media and content services, and other digital-based services. The webscale segment excludes companies with digital business models who rely primarily on rented cloud capacity or collocation space. Twitter, for instance, is not a webscale operator, as its network relies on a mix of rented space in carrier-neutral data centers and rented cloud resources from Google. By contrast, Apple is webscale; although it has partnerships with GCP and AWS for cloud capacity, Apple owns several large data centers, and is building more.
WNOs tracked in this report include the Top 8 companies (Alibaba, Alphabet, Amazon, Apple, Baidu, Facebook, Microsoft, and Tencent) and 12 others: Altaba, ChinaCache, Cognizant, eBay, Fujitsu, HPE, IBM, JD.COM, LinkedIn, Oracle, SAP, and Yandex.
For more information about this report visit https://www.researchandmarkets.com/r/y9tdak
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