Microsoft announced in early November that it will release the preview of Mesh for Microsoft Teams (henceforth referred to as simply “Mesh”) in 1H22 as a chat and collaborative platform for the metaverse. By providing a virtual meeting space, in which Teams users can conduct meetings, chat, work collaboratively, and share documents, Mesh is set to become an entrance to the metaverse.
Community interactions will serve as a starting point for metaverse development
Microsoft first unveiled Microsoft Mesh during its Ignite 2021 event in March. This platform supports applications including HoloLens Mesh and Altspace VR, with more Microsoft Teams services to be released in the future. By announcing ahead of time that the preview version of Mesh will be released in 2022, Microsoft is hoping to leverage the recent emergence of topics related to the metaverse in order to increase its customers’ engagement with the new functionalities of Mesh. Hence, the company is positioning Mesh as an entrance into the metaverse by first attracting users through functions such as teleconferencing, collaboration, and chat. Microsoft will then gradually add to the number of applications and services in the virtual reality, thereby eventually constructing a complete virtual world.
Judging from the current progress of development, TrendForce believes that social communities, teleconferencing, and virtual meetings will become AR/VR applications most attractive to consumers. That is also why companies currently developing AR/VR solutions regard these applications as the starting point of metaverse development. These applications’ trending importance can primarily be attributed to the two reasons of demand and supply. Regarding the demand side, not only has the emergence of the COVID-19 pandemic brought about significant growths in teleconferencing and remote interaction usages, but there has also been a gradual change in how people interact in internet-based communities. More specifically, this change refers to a shift in interactions from texts, images, and videos to virtual avatars. As a result, the consumer market is expected to have a relatively high acceptance for AR/VR-driven community interactions and teleconferences. Regarding the supply side, on the other hand, service providers that operate social media and teleconference platforms drastically differ from the typical hardware brands in terms of product strategy, since these providers generally aim to first create a massive user base rather than deriving profits from a single product. As such, these providers are comparatively more willing to invest massive resources into expanding their presence in the market during the initial phase even though doing so may potentially incur financial losses.
R&D and release of device hardware will become the most significant challenge for platform service providers
For Microsoft, Mesh represents a starting point, not only towards the development of the metaverse, but also one that requires investment in more areas, since the metaverse requires the realization of a virtual world that is more immersive and lifelike. Apart from Microsoft’s existing competencies in cloud services and OS software, the company still needs to achieve a sense of realism in the virtual avatars and interactions that it creates, and these creations need to reflect changes made by the user. For instance, the mouth and facial expressions of virtual avatars need to be able to instantly adapt as their users speak, and this process involves not only software adjustments, but also the integration of sensors and other hardware devices. As long as hardware brands require that their individual products remain profitable, Microsoft will find it difficult to hand over the responsibility of hardware-related technological R&D and product releases to the hardware brands. Unless Microsoft is willing to provide sufficiently high subsidies and absorb all financial losses, it will inevitably release its self-designed consumer AR/VR devices – for the same reason that Meta (also known as Facebook) acquired Oculus, and ByteDance acquired Pico. On the other hand, crossing over to the hardware market represents entering an industry that is yet to mature and that requires investment into multiple technologies. Platform service providers will therefore need to invest more resources into hardware development, and this remains one of the challenges Microsoft faces after entering the metaverse.
Owing to persistently strong demand for notebook panels and increased supply of such upstream components as ICs and TCONs, quarterly notebook panel shipment reached yet another historical high in 3Q21, with 72.27 million pcs shipped, representing an increase of 7.1% QoQ, according to TrendForce’s latest investigations.
TrendForce indicates that the proliferation of the stay-at-home economy resulted in record-setting performances from the notebook panel market, in which quarterly shipment reached historical highs for three quarters consecutively across the 1Q21-3Q21 period. Nevertheless, market demand for panels has shown partial signs of weakening. Demand remains strong for commercial notebooks but has begun plummeting for consumer notebooks and Chromebooks. Alongside this drop in Chromebook demand, 11.6-inch panels, which are the mainstream size of Chromebook displays, have also dropped in terms of shipment volumes, reaching only 10.88 million pcs shipped in 3Q21, a 28.3% QoQ decline. Quarterly shipment of Chromebook panels is expected to undergo a further decrease in 4Q21. In addition, given the aforementioned strong demand for commercial notebooks, panel suppliers have quickly transitioned their focus towards 14-inch and 15.6-inch panels in response, and the combined quarterly shipment of both of these sizes reached 46.45 million pcs in 3Q21, a 20.2% QoQ increase. The bullish performance of these sizes of notebook panels thereby became the key reason behind the historical high in notebook panel shipment in 3Q21.
Due to panel suppliers’ swift response to changes in the market, notebook panel shipment for 2H21 is not expected to be overly impacted by the weakening demand for Chromebooks and consumer notebooks. For now, TrendForce projects notebook panel shipment for 4Q21 to reach 71.15 million pcs, while shipment for the entire 2021 is expected to reach 278.1 million pcs, a 23.2% YoY increase. Looking ahead to 2022 and regarding the supply side of the panel market, most panel suppliers will be aggressive in their shipment plans for notebook panels due to the massive growth in notebook panel shipment across the 2020-2021 period. As such, panel suppliers are planning to ship about 330 million pcs of notebook panels in 2022. However, if a corresponding demand for notebooks fails to emerge next year, the notebook panel market may enter into an oversupply situation, thereby placing downward pressure on panel prices. Regarding the demand side of the panel market, demand for Chromebooks and consumer notebooks will likely continue to slow down next year, but this slowdown will be accompanied by a corresponding growth in commercial notebook demand due to the persistent growth of the overall economy, along with the global digital transformation also taking place. Taking these factors into account, TrendForce expects annual notebook panel shipment for 2022 to reach 279 million pcs, representing a slight growth of 0.3% YoY.
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At Gamescom 2021, Microsoft announced that it will extend its game streaming service (Xbox Cloud Gaming) from PC and mobile devices to game consoles starting on Christmas Day this year. In addition to supporting the new consoles Xbox Series X/S, Xbox Cloud Gaming will also be compatible with the Xbox One models. TrendForce’s investigations indicate that the Nintendo Switch remains the mainstream option in the consumer market and is expected to reach 30.13 million units in annual sales for 2021. The PlayStation 5 consoles, which have been in severe shortage since its release, will take second place with annual sales of 17.61 million units, while the Xbox Series X/S will take third place with 8.66 million units sold this year.
Xbox One owners will comprise the majority of Xbox Cloud Gaming users on game console platforms
Microsoft has been making long-term efforts to promote cloud-based game streaming services. One such example includes the improvements that it made to its web browser to better support Xbox Cloud Gaming and permit the service to run on PC and mobile devices, with official PC and iOS releases taking place in June 2021. Microsoft’s announcement of game console compatibility with Xbox Cloud Gaming represents yet another step taken by the company towards its goal of extending game streaming services to all platforms.
As previously mentioned, Xbox Cloud Gaming supports not only the latest Xbox Series X and S consoles, but also the previous-gen Xbox One models. This wide compatibility can primarily be attributed to the fact that game streaming services have relatively low hardware requirements, thereby making it compatible across virtually all console hardware. The other reason is Microsoft’s aim to quickly expand the user base of Xbox Cloud Gaming. After all, very few people currently possess Xbox Series X/S consoles because these consoles have only been recently released, and their sale volumes have been constrained by the severe shortage of electronic components. Hence, the ability to quickly expand Xbox Cloud Gaming’s user base is contingent on adoption by current owners of Xbox One consoles, whose total cumulative sales are relatively high by now.
Going forward, Microsoft is expected to leverage the attraction of Xbox Cloud Gaming to draw consumers to purchase the Xbox Series X/S through the Xbox All Access installment payment plans. This is also why Microsoft is aggressively collaborating with and acquiring game developers, as having more games playable through Xbox Cloud Gaming will make the service more attractive to consumers.
Xbox Cloud Gaming will likely reduce the willingness of existing Xbox One owners to buy new consoles
Microsoft’s core strategy revolves around its platform and service. By attracting consumers through service first, Microsoft will then be able to raise the sales of its hardware. Put another way, increased hardware sales result in an expanded user base, which will further result in increased earnings through both platform and service.
Hence, the initial sales performances of the Xbox Series X/S are not a point of focus for Microsoft. If the company is able to expand its user base, Microsoft does not even necessarily need to ensure the popularity of the Xbox Series X/S. It can instead potentially release other modified models that are better suited for game streaming services or even simpler, dedicated game streaming boxes. However, in consideration of other services such as Xbox Live Gold, as well as earnings from players that do not subscribe to game streaming services, Microsoft must still maintain a range of game consoles that can compete with the PS5 in terms of specs.
Although Microsoft’s core strategy is in alignment with its software services for the PC market, such as Office and Windows, the heavy push for Xbox Cloud Gaming will inadvertently lower the console replacement demand of existing Xbox One owners. Furthermore, the difference in hardware specifications between the Xbox Series X and Xbox Series S will also complicate the software development process for game developers, in turn reducing the willingness of developers to create games for the latest Xbox consoles and affecting the sales performances of the Xbox Series X/S.
Therefore, it makes sense that despite the similar specs between the Xbox Series X and the PS5, their sales numbers differ wildly. At any rate, the Switch will remain the sales leader in the game console market in 2021, with the PS5 experiencing a gradual sales growth and the latest Xbox consoles lagging behind.
The “new normal” in the post-pandemic era has seen the meteoric rise of high-speed and high-bandwidth 5G applications, which subsequently brought about a corresponding increase in cloud services demand. As such, the global server shipment for 2021 will likely reach 13.6 million units, a 5.4% increase YoY. As commercial opportunities in white-box servers begin to emerge, Taiwanese ODMs, including Quanta, Wiwynn, and Foxconn are likely to benefit.
The prevailing business model of the server supply chain involves having the ODM responsible for the design, hardware installation, and assembly processes, after which servers are delivered to server brands (such as HPE, Dell, Inspur, and Lenovo), which then sell the servers to end-clients. In contrast, a new business model has recently started to emerge; this business model involves having server ODMs responsible for manufacturing specific and customized server hardware, available directly for purchase by such end-clients as cloud service providers, thereby bypassing brands as the middlemen.
With regards to market share, Foxconn accounts for nearly half of the total server demand from Microsoft Azure and from AWS, while Quanta accounts for about 60-65% of Facebook’s server demand.
According to TrendForce’s investigations, ODMs including Quanta, Inventec, Foxconn, Wiwynn, and QCT have all received server orders from clients in the cloud services sector in 1H21. In particular, both Quanta and Inventec received orders from Microsoft Azure, AWS, Facebook, and Google Cloud. With regards to market share, Foxconn accounts for nearly half of the total server demand from Microsoft Azure and from AWS, while Quanta accounts for about 60-65% of Facebook’s server demand, in turn giving Foxconn and Quanta the lion’s shares in the ODM market.
The aforementioned Taiwanese ODMs have been aggressive in growing their presence in the private industrial 5G network and edge computing markets, with Quanta subsidiary QCT being a good case in point as an ODM that supplies servers to both telecom operators and private industrial networks for these clients’ respective 5G infrastructures build-outs.
More specifically, QCT stated the following in a press release dated Jan. 4, 2021:
“Quanta Cloud Technology (QCT), a global data center solution provider, independently developed Taiwan’s first 5G standalone (SA) core network, which recently passed interoperability and performance verifications for 5G Open Network Lab operated by Taiwan’s Industrial Technology Research Institute (ITRI). The core network was successfully connected to partner radio access networks (RAN) and third-party user equipment, realizing end-to-end 5G signal transmission from edge to core and achieving significant acceleration in both uplink and downlink speeds.”
In response to the edge computing demand generated by global 5G commercialization efforts, Wiwynn recently released the EP100 server, which is a 5G edge computing solution compliant with the OCP openEDGE specification. Developed in collaboration with U.S.-based 5G software solutions provider Radisys, the EP100 can function as an O-DU or an O-CU depending on the various 5G RAN needs of telecom operators.
Furthermore, Wiwynn is continuing to develop the next generation of edge computing servers targeted at the enterprise networking and edge computing segments.
Foxconn, on the other hand, has been focusing on developing vertical solutions for private industrial 5G networks. Foxconn’s hardware infrastructure offerings include edge computing servers, TSN network switches, and gateways. The company also offers a slew of software solutions such as data management platforms and other apps, hosted by Asia Pacific Telecom. Last but not least, Foxconn recently announced an additional US$35.6 million investment in its Wisconsin project; this injection of capital will make the company well equipped to meet the demand for servers as well as 5G O-RAN and other telecom equipment.
Thanks to their flexible pricing schemes and diverse service offerings, CSPs have been a direct, major driver of enterprise demand for cloud services, according to TrendForce’s latest investigations. As such, the rise of CSPs have in turn brought about a gradual shift in the prevailing business model of server supply chains from sales of traditional branded servers (that is, server OEMs) to ODM Direct sales instead.
Incidentally, the global public cloud market operates as an oligopoly dominated by North American companies including Microsoft Azure, Amazon Web Services (AWS), and Google Cloud Platform (GCP), which collectively possess an above-50% share in this market. More specifically, GCP and AWS are the most aggressive in their data center build-outs. Each of these two companies is expected to increase its server procurement by 25-30% YoY this year, followed closely by Azure.
TrendForce indicates that, in order to expand the presence of their respective ecosystems in the cloud services market, the aforementioned three CSPs have begun collaborating with various countries’ domestic CSPs and telecom operators in compliance with data residency and data sovereignty regulations. For instance, thanks to the accelerating data transformation efforts taking place in the APAC regions, Google is ramping up its supply chain strategies for 2021.
As part of Google’s efforts at building out and refreshing its data centers, not only is the company stocking up on more weeks’ worth of memory products, but it has also been increasing its server orders since 4Q20, in turn leading its ODM partners to expand their SMT capacities. As for AWS, the company has benefitted from activities driven by the post-pandemic new normal, including WFH and enterprise cloud migrations, both of which are major sources of data consumption for AWS’ public cloud.
Conversely, Microsoft Azure will adopt a relatively more cautious and conservative approach to server procurement, likely because the Ice Lake-based server platforms used to power Azure services have yet to enter mass production. In other words, only after these Ice Lake servers enter mass production will Microsoft likely ramp up its server procurement in 2H21, during which TrendForce expects Microsoft’s peak server demand to take place, resulting in a 10-15% YoY growth in server procurement for the entirety of 2021.
Finally, compared to its three competitors, Facebook will experience a relatively more stable growth in server procurement owing to two factors. First, the implementation of GDPR in the EU and the resultant data sovereignty implications mean that data gathered on EU residents are now subject to their respective country’s legal regulations, and therefore more servers are now required to keep up the domestic data processing and storage needs that arise from the GDPR. Secondly, most servers used by Facebook are custom spec’ed to the company’s requirements, and Facebook’s server needs are accordingly higher than its competitors’. As such, TrendForce forecasts a double-digit YoY growth in Facebook’s server procurement this year.
Chinese CSPs are limited in their pace of expansions, while Tencent stands out with a 10% YoY increase in server demand
On the other hand, Chinese CSPs are expected to be relatively weak in terms of server demand this year due to their relatively limited pace of expansion and service areas. Case in point, Alicloud is currently planning to procure the same volume of servers as it did last year, and the company will ramp up its server procurement going forward only after the Chinese government implements its new infrastructure policies. Tencent, which is the other dominant Chinese CSP, will benefit from increased commercial activities from domestic online service platforms, including JD, Meituan, and Kuaishou, and therefore experience a corresponding growth in its server colocation business.
Tencent’s demand for servers this year is expected to increase by about 10% YoY. Baidu will primarily focus on autonomous driving projects this year. There will be a slight YoY increase in Baidu’s server procurement for 2021, mostly thanks to its increased demand for roadside servers used in autonomous driving applications. Finally, with regards to Bytedance, its server procurement will undergo a 10-15% YoY decrease since it will look to adopt colocation services rather than run its own servers in the overseas markets due to its shrinking presence in those markets.
Looking ahead, TrendForce believes that as enterprise clients become more familiar with various cloud services and related technologies, the competition in the cloud market will no longer be confined within the traditional segments of computing, storage, and networking infrastructure. The major CSPs will pay greater attention to the emerging fields such as edge computing as well as the software-hardware integration for the related services.
With the commercialization of 5G services that is taking place worldwide, the concept of “cloud, edge, and device” will replace the current “cloud” framework. This means that cloud services will not be limited to software in the future because cloud service providers may also want to offer their branded hardware in order to make their solutions more comprehensive or all-encompassing. Hence, TrendForce expects hardware to be the next battleground for CSPs.
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