Telecom innovations such as 5G are creating exciting new possibilities for businesses and consumers. Yet at the same time, the basics of network architecture have barely evolved since the last century. Today, 80 to 90 percent of telecom operators still rely on traditional methods when implementing radio access network (RAN) systems.
That is finally changing, as recent innovations in RAN models enable significant improvements in efficiency. Today, a variety of converging factors strongly suggest an imminent boom in adoption of new RAN technologies that could potentially help fuel innovation and cost reduction at a time when all telcos face strong economic and financial headwinds. The exact pace and scale of this revolution, however, remain uncertain, with questions regarding issues such as transition costs, performance, and talent requirements all posing potential constraints.
To stay abreast of this dynamic environment, it is important for industry players to pay close attention to adoption strategies. We’ve combined analyst expertise, independent research, and the findings of a detailed survey of more than 50 telecom executives to identify key trends and indicators to track as the RAN marketplace continues to evolve.
The emergence of ‘xRAN’
RAN technologies provide an essential foundation of mobile telecom services provision. At a basic level, RAN functionality is built around a site comprising a tower, electronics, antennas, and supporting passive infrastructure such as air conditioning, fencing, and cabling. Multiple sites, in turn, are connected with one another and with a backhaul and a core network that manages end-user information and links to external networks.
Advances on multiple fronts have fueled the emergence of a few new approaches to RAN that can broadly be characterized as xRAN. By reducing physical-asset requirements, and by streamlining and standardizing implementation, xRAN is expected to reduce capital expenditures (capex) and operational expenditures (opex) spending, enhance vendor diversification, and spur vendor competition.
xRAN models fall into three categories or “flavors”—centralized RAN (CRAN), open RAN (ORAN), and virtual RAN (VRAN)—all with different benefits, challenges, and drivers of adoption:
- CRAN drives centralization, thereby improving efficiency by pooling resources. Under this architecture, hundreds of mobile sites can share parts of the equipment based at a single location rather than each site requiring its own equipment.
- ORAN enables the openness required to develop new, more standardized interfaces among RAN network components. By facilitating multivendor environments, ORAN can also encourage competition and innovation. Industry initiatives such as the O-RAN Alliance bring industry players together to reinforce standardization efforts.
- VRAN supports virtualization, which leverages cloud concepts to decouple network hardware from software to enhance scalability and network agility.
Each of these models involves various cost/performance trade-offs. And while distinct in approach and characteristics, overlaps and synergies among the three models allow operators to take a hybrid approach when implementing and scaling deployments. Given the multiple considerations involved, effective xRAN deployment requires deep understanding of technology, cost, and strategy.
Waiting for the S-curve: Benefits, drivers, and constraints
To gain insight into the direction of the xRAN market, we surveyed approximately 50 telecom executives from established operators around the globe, focusing on expectations of potential benefits and challenges, as well as readiness to adopt CRAN, VRAN, and ORAN models. The survey findings are complemented by McKinsey industry research on cost benchmarks and operator architectures, as well as insights and analyses from McKinsey experts.
Our survey found that most of the operators surveyed view cost savings, faster service deployment, and vendor diversification as the key potential benefits fueling xRAN adoption (Exhibit 1).
Moreover, industry executives agree that a wave of xRAN adoption is on the horizon. A majority of operators we surveyed say that they expect new models to characterize 65 to 70 percent of environments by 2030. A significant majority also say that they see strategic advantages from early xRAN adoption. These include:
- stimulating vendor competition and disrupting the vendor landscape
- taking a lead in building xRAN
- being perceived as technology innovators by the industry and investors
Nonetheless, some 40 percent of operators say they will delay xRAN initiatives until leading tier-one operators implement fully functional xRAN deployments, with an additional 15 percent saying that they will wait until “most of the industry” has fully deployed the technology. While roughly a third of operators say that they don’t intend on taking their lead on xRAN from others, top telecom players that scale up adoption could clearly be a key factor in spurring many others to follow.
Network cost implications
A large majority of operators believe xRAN will ultimately drive lower costs—70 percent anticipate a reduction in capex while 60 percent expect to see lower opex (Exhibit 2). Over the short term, however, two-thirds of operators surveyed say that they anticipate capex increases, while one-third expect opex to increase.
Our analyses, meanwhile, show a potentially wide range of net cost effects from xRAN adoption today, ranging from a 10 percent reduction to a 10 percent increase. These variances reflect the context and positioning of a specific operator, types of models deployed, and scale of implementation. Discrete, targeted deployments will likely yield higher savings than large-scale initiatives aimed at transforming network architectures uniformly over a full footprint. That said, savings should increase in the future as the technology matures.
Looking at the three specific xRAN models in detail, we see a divergence of near-term cost impacts and drivers.
CRAN: CRAN has the biggest outcome on savings, potentially reducing overall RAN total cost of ownership (TCO) by 5 to 7 percent. More specifically, centralization can reduce energy costs by 5 to 10 percent, rental costs by up to 15 percent, operations and maintenance costs by 5 to 10 percent, and RAN equipment costs by 5 to 8 percent. Actual results achieved depend largely on each provider’s situation, as savings can easily be offset by required investments in fiber and transmission equipment. For example, operators that rely heavily on tower companies (TowerCos) may experience little cost impact from CRAN, due to long-term rental commitments.
Primary cost increase drivers for CRAN implementation at present are transmission and backhaul network upgrades to enable CRAN architectures, which vary highly by operator, depending on the current level of fiberization of the network. Transition costs may result in increased capex over the short term. Still, the reduction of physical assets through network centralization inherently drives capex and opex reduction.
ORAN: ORAN, meanwhile, is expected to spur industry competition, encourage innovation, weaken vendor lock-in, and support best-of-breed solutions. These trends will impact operators to varying degrees, depending on their market position and current vendor setup. However, virtualized, multivendor environments could increase ORAN systems integration costs by 10 to 20 percent in the short run, depending on the starting point and capabilities of the operator.
VRAN: At present, VRAN TCO may be 3 to 5 percent more than traditional RAN, due to higher equipment and energy costs, as well as lagging cost-performance of commercial off-the-shelf (COTS) hardware. Dense traffic areas can pose particular implementation challenges. Looking ahead, however, we expect COTS hardware to close the performance gap against incumbent solutions, as semiconductor players leverage rapid innovation cycles and in-house knowledge gained through collaboration with incumbent equipment-maker OEMs on chipset development. As a key enabler of ORAN, moreover, virtualization offers the strategic advantage of fueling industry competition and its related benefits.1 When these expectations will be realized remains an open question.
Implications for the vendor landscape
Approximately 50 percent of operators are expecting VRAN and ORAN to propel massive vendor ecosystem diversification. Many vendors are already trying to tap into the ORAN opportunity on the software side by targeting specific solutions, from open orchestration to centralized unit/distributed unit software. We also see an emerging constellation of technology vendors and system integrators providing off-the-shelf solutions for ORAN implementation, as well as tailoring custom solutions for a specific operator.
By driving standardization and reducing vendor lock-in, xRAN evolution is likely to spur the emergence of specialized vendors that play a specific role in a multivendor environment. Twenty-five percent of operators surveyed say that they believe VRAN will accelerate vendor specialization, while 40 percent indicate they think ORAN will have that impact. While potentially enabling best-of-breed solutions, competition, and innovation, specialization can lead to a proliferation of vendors that focus on separate network components. This, in turn, could create significant challenges around managing multiple players in a complex environment.
To address the systems integration challenge, we see outsourcers and service providers entering the xRAN multivendor management space (for example, Tech Mahindra). Another solution is to integrate multiple niche providers into a consolidated, end-to-end offering. Rakuten, for example, has developed a turnkey xRAN solution based on its national-scale deployment in Japan. Docomo is also developing its ORAN Ecosystem solution (OREC) to promote Open RAN adoption. The question is whether other operators will leverage existing systems integration expertise—or invest in new capabilities—to pursue a similar approach.
Operators are bullish on xRAN’s technology impact, with approximately three-quarters saying they believe that openness and virtualization will enhance innovation. More specifically, 50 to 70 percent of operators expect xRAN building blocks to facilitate deployment and adoption of 5G use cases around Internet of Things, mission-critical use cases, or at-scale enhanced mobile broadband. Meanwhile, 5 to 15 percent of operators believe xRAN will negatively affect these trends.
In terms of obstacles to xRAN deployment, 62 percent of operators voice concerns regarding xRAN performance today relative to traditional RAN. While the outlook improves over time, performance remains the primary worry over the long term for xRAN skeptics. Relatedly, xRAN reliability receives mixed reviews, with almost half of operators expressing concerns that immature, multivendor environments might lead to gaps in reliability. After decades of running single-vendor RAN environments, the industry may require some time to build confidence in the reliability of multivendor RAN.
Enabling the S-curve: Closing the gaps
The evolution of xRAN represents a new reality that is poised to transform operator capabilities and operating models. Today, however, only about 20 percent of operators believe their organizations are equipped to run an xRAN environment.
For the vast majority, significant capability gaps must be addressed. Most glaring: a lack of relevant experience and capabilities needed to manage xRAN and, specifically, to oversee multiple vendors. About a quarter of operators surveyed say they have only one vendor in their networks today, and about the same proportion have not done a major vendor swap in the last investment cycle.
The evolution of xRAN represents a new reality that is poised to transform operator capabilities and operating models.
Operators identify network engineering as the organizational area most affected by xRAN, with significant changes expected in the areas of operations and maintenance, network planning, optimization, and deployment.
In terms of capability requirements, system integration engineers and network architects are the most critical need (Exhibit 3). Operators that currently manage only one or two vendors see systems integration needs as particularly urgent, while operators managing three or more RAN vendors prioritize network architects.
To close the systems integration gap many operators are planning to rely on outsourcing, as they have done over the past decade to address RAN rollout and operations. These providers will include new ORAN vendors, incumbent OEMs, and third-party systems integrators.
xRAN is also propelling significant change in operating models, with two-thirds of operators saying that they envision a holistic transformation. While telcos have traditionally struggled to introduce agile methodologies to network implementation, xRAN may facilitate steps in this direction by creating cross-functional “tribes” around new xRAN capabilities, driven by increasingly “software-ized” (VRAN) and multivendor (ORAN) environments.
Potential xRAN drivers and scenarios
While interest levels are high and the industry is keen to leverage xRAN benefits, key questions surround operator willingness and ability to adopt xRAN at scale. As a result, early xRAN deployments will likely target pockets of opportunities and specific circumstances.
That said, several potential industry scenarios could drive xRAN adoption on a much wider scale. From our perspective, these include the following:
- ORAN vendors consolidate into a few integrated, end-to-end solution providers, offering a competitive alternative to existing OEMs.
- The industry doubles down on standards, encouraging systems integrators to take a more active role in providing a middle layer between operators and ORAN players.
- Leading operators develop in-house systems integration capabilities and xRAN labs that export as-a-service solutions to other players, for example, as is currently being done by Rakuten and docomo.
While tier-one adoption is clearly the key driver of xRAN deployment, we asked operators to identify additional triggers that could accelerate xRAN implementation. At the top of the list is new technology deployment, which can include rollouts of small-cell networks, 5GSA (stand-alone 5G), or 6G. Such initiatives are less reliant on legacy equipment and therefore more open to vendor diversification. By reducing the infrastructure investments required for xRAN initiatives, these deployments may build momentum for adoption.
Collaboration and standardization are additional drivers of xRAN adoption, particularly for ORAN and VRAN. Operators today are exploring initiatives such as bilateral agreements and joint solution testing, as well as focusing on interface standardization as an essential component of scalable, multivendor deployment.
Most telecom operators today continue to rely on traditional network architectures, but ongoing advances around cloud, centralization, and standardization are creating new opportunities to apply innovative xRAN models. Industry interest in these approaches is growing, and many players are exploring their options and potential go-to-market strategies. In addition, some operators are pursuing early adoption, thereby laying the groundwork for new entrants. That said, obstacles exist, primarily around transition costs and potential management challenges associated with overseeing disparate multivendor environments. Nonetheless, our view is that momentum will continue to grow, and that a critical mass of industry players will conclude that the benefits of xRAN adoption outweigh the risks, triggering an S-curve path of rapid adoption.