March 31, 2021
The merits of Open RAN have become a topic of much debate in wireless circles. This is unsurprising since Open RAN will – or will not – drive hundreds of billions of dollars of investment by telecom equipment manufacturers, mobile network operators and the investment community as they develop, deploy, and reap the rewards of new network technologies. There are, in fact, real dangers in making the incorrect choice. At present, most investment in Open RAN is mis-directed and will offer mediocre returns at best.
Why? Open RAN’s implications for urban, sub-urban and off-grid markets are misunderstood. Performance requirements of urban markets mean Open RAN will not gain traction there for the foreseeable future. The lower performance requirements of suburban markets make them a good fit for Open RAN, but the sustaining nature of the innovation suggests market incumbents will continue to dominate. The current lack of effective vertically integrated product solutions for off-grid markets means the Open RAN products addressing this market have strong potential for disruption.
To help understand this situation, start with two frameworks suggested by the late theorist Clayton Christensen. The first relates to assessing whether a product represents a disruptive or sustaining innovation; the second relates to assessing the conditions under which a vertically integrated value chain will fragment into discrete components.
Defining disruptive and sustaining innovations
Much has been written about the distinction between disruptive and sustaining innovations. The following definitions provide a good starting point: a disruptive innovation underperforms mainstream products but has new attributes that a subset of customers (sometimes new customers) value. A sustaining innovation improves product attributes that are already valued by the mainstream market.
Christensen says that when mainstream products become so good (through a number of sustaining innovations over a period of time) that they overserve the mainstream market, it allows disruptive products to find success within the subset of customers that desire the new attributes offered by the disruptive product, and to grow within this niche market.
A key element in such a disruption is that existing products overserve the market need. Interestingly, this element is also present in Christensen’s second framework: the analysis of when an integrated product may fragment into discrete components. Christensen says this is only possible when customer performance requirements are satisfied so that other attributes such as flexibility, reliability or convenience become the basis for buying decisions. Since un-integrated solutions can more easily achieve many of these attributes, the market will move away from vertically integrated products and toward an ecosystem in which multiple vendors independently develop and improve components that are assembled into a product built from best-of-breed components.
Open RAN: Costs and benefits vary by market.
Applying these frameworks to the developing Open RAN ecosystem yields several insights. Most importantly, the analysis has dramatically different outcomes for urban, sub-urban and off-grid markets (rural markets where there is no telecommunications or reliable power grid).
Open RAN products hold the promise of enabling lower total cost of ownership for mobile network operators, as well as the ability to assemble systems from best of breed components that are uniquely adapted to MNO needs in the markets they serve. However, Open RAN comes with a performance cost. A system built around an open architecture with well-defined interfaces cannot match the performance of a vertically integrated product, which can “break” interfaces to improve performance through cross-layer optimizations and tighter integration.
This means vertically integrated products can offer performance advantages in densely populated urban areas where high subscriber demand drives the need for the most spectrally efficient, high-capacity, high-data rate, low-latency systems. This is also where the highest concentration of the best customers of MNOs work and/or reside (and where MNOs typically make most of their money). The current and next generation of Open RAN products are unlikely to provide solutions that meet the current urban market performance requirements.
It is unclear when the performance of vertically integrated solutions will exceed the needs of urban markets, allowing MNOs to adopt Open RAN in urban areas. Until then, since performance is so important in these markets, Open RAN will not gain traction. Since urban markets are the most valuable markets, integrated products from incumbent vendors will continue to reap the highest margin opportunities. Score one for the incumbents.
Suburban markets are likely to provide a better short-term product-market fit for Open RAN-architected products. In fact, MNOs have said they are interested in the reduced total cost of ownership that can be realized from Open RAN deployments and early trial and proposed deployment activity from MNOs confirms that suburban markets are the initial target. However, Christensen notes that when it comes to sustaining innovations, there is little premium on being first to market and that market incumbents tend to incorporate valuable sustaining innovations at the pace at which their customers are ready to adopt them. The strong MNO desire to incorporate Open RAN solutions into suburban offerings shows that Open RAN solutions offer what the existing mainstream products do (less expensively). This means Open RAN is a sustaining innovation with respect to suburban markets. (The move from vertically integrated to open architectures is not, per se, disruptive.)
The bottom line is that the suburban market looks to be a great fit for Open RAN, but, because Open RAN improves products along axes sought by the suburban market and the suburban market is not currently limited by performance of existing products, Open RAN is a sustaining innovation in the suburban market. Therefore, the suburban market is likely to continue to be dominated by incumbent vendors, who will offer Open RAN compliant systems and components. This change in suburban markets will be a win-win for MNOs (which will obtain lower costs) and for incumbent product vendors (if they play their cards correctly and outsource commodity aspects of the overall solution while retaining the highest value elements.) This will enable MNOs to acquire attractive new solutions at a low cost from a comfortingly familiar source.
Disrupting the off-Grid market with Open RAN
The ray of sunshine for new entrants is what we at Vanu call the off-grid market. This market is largely unserved by MNOs because existing solutions cost more to own and operate than the revenue potential of the market will justify. This problem is solved by making tradeoffs against traditional performance metrics resulting in a product that underperforms mainstream products in key areas, but has new attributes valued by a subset of the market.
For example, instead of maximizing capacity (a traditionally valued product attribute), the off grid marketplaces higher value on a different attribute: low power consumption. The flexibility of products employing the open architectures to incorporate components that best address these unique needs means that Open RAN products are the quickest to market at the lowest cost. Seen through the eyes of a traditional solution, these products underperform. However, the off-grid market values the new attributes more highly, since they enable MNOs to grow revenue, profit, and subscribers by serving this previously underserved market.
The debate around the merits of Open RAN will continue for several years. As noted above, Open RAN as inevitable. The biggest questions are where will Open RAN find the most traction and who will benefit. The opinions offered above have attempted to briefly outline relevant considerations. Christensen’s work regarding disruptive innovations has yielded valuable insight to the team at Vanu.
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