Constrained consumer finances, a rebalancing of the residential Wi-Fi equipment market post-COVID-19, the dwindling of fresh opportunities, and postponed Customer Premises Equipment (CPE) upgrades are all dragging down residential Wi-Fi equipment shipments. What does this mean for ecosystem vendors, and how should they respond?
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Residential Wi-Fi Equipment Shipments Experience Third Consecutive Quarter of Contraction
Total worldwide shipments of residential Wi-Fi equipment continued to decline in 3Q 2023, shrinking 6.0% from the previous quarter, ending up 13.0% lower than they were in 3Q 2022. Given the poor state of the global economy, it is natural to assume that economic uncertainty and reduced consumer spending is the root of this downturn. Although these factors are not insignificant, they constitute only one half the story. Equally as important has been myriad other market dynamics dragging down shipments, ranging from a rebalancing of the market post-COVID-19, the dwindling of fresh opportunities, and postponed Customer Premises Equipment (CPE) upgrades. This ABI Insight analyzes three of the key factors outside of constrained finances driving this shipment decrease of residential Wi-Fi equipment, and assesses what they mean for the industry going forward.
It's (Not Just) the Economy, Stupid
Although not an outright recession, the global economy is performing poorly, and consumers the world over are tightening their belts—a phenomenon that will, of course, reduce consumer spending available for Wi-Fi infrastructure. Yet, aside from this obvious factor, a range of other key market dynamics are at play, including the following:
Pandemic-Induced Boost to Retail Market Has Ended: The lockdowns and sudden implementation of home working and learning in 2020 triggered a spike in retail sales of Wi-Fi equipment from consumers who urgently needed to improve their home Wi-Fi network. This caused a realignment of the ratio of retail equipment versus service provider Wi-Fi CPE shipments, which increased from its typical share of around 15.0% of the total market in the 2010s to a record high of 23.3% in 2020. The balance remained broadly at this level across the following 2 years, but 2023 has seen demand for retail Wi-Fi equipment began to subside. This is due to several factors, including:
- Many home networking requirements were already addressed during the COVID-19 pandemic.
- The gradual trend toward a return-to-office alleviated the demand on home networks.
- Facing heightened competition, Internet Service Providers (ISPs) raised the capabilities of their deployed Wi-Fi equipment to create more compelling value propositions. This negated the need for customers to turn to retail solutions.
Due to the above reasons, although residential Wi-Fi equipment shipments across the board declined between 2Q 2023 and 3Q 2023, the 11.4% drop in the retail channel was significantly sharper than the 4.5% reduction in shipments to ISPs. Measured annually between 3Q 2022 and 3Q 2023, shipments to retail dropped almost a quarter (23.8%), whereas the slide in shipments to ISPs was just 9.8%. The rapid contraction in the retail market has led to the retail/ISP shipment ratio beginning to retreat to historical levels in 2023. As of 3Q 2023, the ratio now stands at 20.3% for retail and 79.7% for ISPs, and ABI Research forecasts that by the end of 2024, retail will constitute just 15.7% of total shipments, declining further to a mere 13.0% in 2028.
Slowed Growth of New Serviceable Passive Optical Network (PON) Opportunities: The migration away from the legacy broadband access technologies of Digital Subscriber Line (DSL) and cable toward higher-performance fiber-optic necessitates new PON-equipped modems or gateways. As fiber deployments worldwide have accelerated over the past decade, and an increasing number of customers have been connected by fiber, many new opportunities for vendors of PON infrastructure have emerged. However, the expansion of the addressable PON market has now stalled, caused by the following:
- Most of the PON opportunities in markets that have already attained high rates of fiber penetration have been exhausted. Most notably, in Mainland China, where 93.3% of broadband subscribers are connected by fiber, the vast majority of fiber-connected homes have already been already equipped with PON, forcing local vendors to look overseas for new opportunities.
- Fiber deployments in markets with low levels of fiber penetration are progressing at a slow pace. The most prominent example is the United States, which, at only 18.8% of homes connected by fiber today, has plenty of room for fiber expansion. Yet, although the Broadband Equity Access and Deployment (BEAD) program has set aside US$42.45 billion for expanding Internet access, funding distribution is piecemeal, meaning it will be some time before these new PON opportunities materialize.
Operators Delay CPE Deployments in Anticipation of Wi-Fi 7: Anticipation for Wi-Fi 7 has been high throughout 2023—back in 1Q 2023, all the major U.S. operators had already sent out Requests for Proposal (RFPs) for Wi-Fi 7 CPE. At the same time, few Wi-Fi 6E deployments have been made in the year to date, reflecting a widely held belief that Wi-Fi 6E was merely a steppingstone standard, and that its relevance would rapidly decrease upon the arrival of Wi-Fi 7. Further impacting confidence in Wi-Fi 6E was the uncertainty over the status of unlicensed 6 Gigahertz (GHz) access, and a general lack of client device support. The consequence of the decision by many operators to forego Wi-Fi 6E and postpone new CPE deployments until Wi-Fi 7’s arrival has further dragged down Wi-Fi CPE demand in 2023.
How Significant Are These Developments and What Response Is Needed?
The dynamics outlined above will exert a considerable impact on the residential Wi-Fi equipment market in the near term. Below are some of the major consequences and recommendations for how vendors should respond:
Retail Opportunities to Narrow and Concentrate in the High-End: As the market for retail Wi-Fi equipment contracts, competition between vendors will intensify. Moreover, the deployment of higher performance CPE from ISPs will also squeeze out the retail mid-market, leaving the remaining opportunities to coalesce in the high-end. To succeed in this market, vendors will need to differentiate through cutting-edge technological leadership, unique product types, or innovative business models.
Product Diversity and New Partnerships Required to Reach New Customers: Many potential customers, particularly in North and South America, will not see fiber connectivity for a long time, if at all. Therefore, alternative product types are necessary to reach this subset of the population. One answer on the market today is 5G Fixed Wireless Access (FWA) CPE, whereas visionary vendors might consider exploring satellite connected CPE. To gain a foothold with these potential customers, vendors could also look to partner with the suppliers of the alternative access technologies.
Wi-Fi 7’s Arrival Will Rejuvenate Market: Wi-Fi 7 equipment certification is set to begin imminently, and the performance benefits of this new 802.11 standard will provide a strong incentive for consumers to upgrade. ISPs will be incentivized to deploy Wi-Fi 7 as it will help raise their value proposition for consumers and heighten their competitiveness, whereas consumers will be attracted to the new standard as it will address the capacity issues they face and allow for both improved performance for existing applications and enable entirely new ones. Due to this, annual residential Wi-Fi 7 equipment shipments are forecast to increase rapidly after the standard’s introduction. Reaching 10.6 million next year, residential Wi-Fi 7 equipment shipments will almost triple to 31.4 million in 2025, and more than double the following year to 82.7 million in 2026. Given this pent-up demand, vendors should plan for shipment expansion upon Wi-Fi 7’s arrival, even though shipments are currently in a period of contraction.
Compensating for Cyclical Hardware Market Will Require New Strategies: Residential Wi-Fi equipment revenue is falling alongside shipments, declining 7.4% between 2Q 2023 and 3Q 2023. Many of the reasons behind the stalling shipments and revenue (e.g., awaiting the next Wi-Fi standard and the slowing of new PON opportunities) are due to the cyclical nature of the market. Therefore, vendors can help stabilize their business by deploying additional value-added services. These value-added services are not reliant on new hardware, as they can be deployed remotely, and they enable the generation of ongoing revenue streams that are free of technology cycles. Wi-Fi sensing is one example of an emerging value-added service with high potential.