First, my goal with this thesis is to bring clarity to an area that can be quite confusing for investors given the rapidly evolving 5G market. Previously, all you had to do was check Verizon news (NYSE: VZ) and AT&T (NYSE:T) awarding RAN (radio access network) contracts to Ericsson (NASDAQ:ERIC), Nokia (NOK) or Samsung Electronics (OTC:SSNLF).

Now discussions are also swirling around terms such as private 5G, edge computing and multiple access edge computing (“MEC”), with stakeholders working with big public cloud providers like Amazon (NASDAQ :AMZN), Microsoft (NASDAQ:MSFT), and even Google (NASDAQ:GOOG).

Unless you are immersed in the 5G arena, it can be quite complicated to understand the interplay between Telcos (Telecom Operators), Equipment Vendors and Cloud Providers with the article titles below. below illustrating my point.

These titles give the impression that they all work together, which is far from reality. Thus, it becomes essential to identify the different strategies in a highly competitive environment made more difficult by the need to monetize huge investments in 5G faster, higher inflationary pressures and higher borrowing costs after the Fed raised interest rates last week.

Restoring businesses as part of 5G monetization

Telcos face the dilemma of monetizing a technology that holds great promise for high-margin growth, but the reality is that the vast majority of consumers have yet to discover a reason to upgrade their plans. of service to 5G. Most don’t need blazing fast speeds and low latencies for their smartphone apps and it seems the network has evolved faster than what apps actually need to run normally.

Additionally, there is stiff competition between AT&T and its peers (including T-Mobile (NASDAQ:TMUS)), which must give away free phones to drive 5G adoption, and this against the backdrop of a Additional spectrum available through the C-group auctions as well as DISH (DISH) is gearing up for launch.

One way to generate higher returns on 5G investments is to introduce tiered pricing and sign long-term contracts with good customers. Another solution, while waiting for new applications to come on the market and for requests related to the metaverse to materialize, is for telecom operators to turn to enterprise 5G or private 5G as I explained recently in my article entitled “Making sense of the Nokia-Kyndryl partnership in the context of Industry 4.0”. This is the demand for high bandwidth (using 5G or even 4G LTE) from large enterprises with operations dispersed over a large geographic area.

Here, the business case for setting up a remote RAN with fiber optic connectivity to the central hub thousands of miles away (as part of the backhaul) to serve individual businesses makes little sense. compared to public 5G or the network used by millions of consumers like you and me.

In other words, after spending millions of dollars upgrading their public cellular network (shown below for Verizon), it’s not cost-effective to deploy additional expensive infrastructure at the edge (or in areas sparsely populated borders).

At the same time, with the advent of 5G and smartphones equipped with more processing power, business needs have also evolved and there is now a burgeoning demand for low latency cloud-based applications. To seize these opportunities, the two telecom operators have chosen a cost-effective path that includes ties with large public cloud providers such as Microsoft, Amazon and Google, which can rapidly scale the compute and storage resources required.

I start with AT&T which aims to make its AT&T Network Edge available through the Microsoft Azure cloud platform.

AT&T with Microsoft for central and private 5G

With a commitment of $9.1 billion for new wireless licenses, earning it the status of the highest bidder in the $22.5 billion the mid-band spectrum auction, AT&T, is making rapid progress in 5G and fiber services. Its strategy also consists in divesting from its media activity.

The company has worked with Microsoft for June 2021 and the partnership is for the telco to move its 5G core and part of the RAN to the Azure cloud. Given the massive scale of AT&T’s operations and the fact that the 5G core is at the very center of the cellular implementation, that’s something unusual, but the goal is to save money. through OpEx or OpEx model rather than using CapEx. This is exactly like customers who choose the IaaS (Infrastructure as a Service) subscription model involving the payment of monthly fees instead of investing Capex in building expensive infrastructure.

Additionally, the Azure Edge Zones partnership aims to bring compute closer to AT&T’s enterprise customers, enabling them to rapidly build all kinds of applications ranging from virtual reality for gamers to analytics-based solutions for managing work in warehouse type environments. Here, as shown in the diagram above for the edge zone called Metro A, the key is low latency achieved by bypassing the need to connect through the central cloud.

As for Verizon, it has a different strategy and does not plan to move its core workload from the 5G network to a hyperscaler (public cloud provider) platform in the same way as AT&T.

Verizon and its industry-leading partnerships

Instead, Verizon, while also embarking on cutting-edge projects to provide value-added services to its business segment, aims to house its 5G workload internally, in its own private cloud.

From a strategic perspective, private 5G and edge services can be seen as the most visible part of the digital transformation trend that gained strength after industrial supply chains began to be disrupted. from 2021. To solve the problem and bring more efficiency to operations, there is a need for better coordination throughout the value chain, achievable thanks to industry 4.0, or more precisely the use of connected devices powered by analytics.

To that end, Verizon is offering MEC capabilities with AWS, Google, and Microsoft to combine its 5G Edge with the compute and storage services of hyperscalers. The goal is to support real-time enterprise applications such as production line automation in factories, as shown in the diagram below.

On the cost side, Verizon plans to inject $21.5 billion in capital in 2022 to continue rolling out 5G and fixed wireless. Dividing this figure and excluding the C-band component, the expenditure should be in the range of $16.5 billion to $17.5 billionwhich is a decrease from $18.2 billion in 2021. The reason for the decrease is that the company has started to move towards “llower capital intensity“.

In other words, Verizon’s strategy of not outsourcing its 5G infrastructure (core and RAN) could stem from the fact that its investments are now less capital-intensive, freeing up funds that can be redeployed elsewhere.

Concluding with opportunities in Industry 4.0

Also, unlike 4G, when telcos would extend their geographic coverage to densely populated areas and sign up more subscribers to spread the cost, it no longer works for fifth-generation wireless. Here, the relatively higher expenditure incurred to extend coverage to remote sites and residential customers not massively adopting 5G, both call for a different strategy, given the industrial demand.

Harnessing this demand can mean higher revenue for AT&T and Verizon, especially for their enterprise segments, and the partnership deals they sign with hyperscalers and RAN Providers should allow for margin gains. This is made possible through cost sharing in setting up private 5G, edge or MEC solutions for individual businesses. This strategy common to both operators is illustrated in the third line of the table below entitled “5G Edge Strategy”.

As for dollar opportunities, these are part of Industry 4.0, which is expected to grow from $116.14 billion in 2021 to $337.10 billion in 2028, or ten times the private 5G market during the same period.

Additionally, as illustrated in the second line, AT&T has taken the cost logic a step further by partnering with Microsoft to host its strategic 5G infrastructure. The main motivating factor appears to be cost savings, as by the end of 2022 the company plans to increase the investment needed to deploy midband 5G fiber and spectrum for $24 billion.

Continuing further, Verizon, with its fully owned cloud strategy for 5G and RAN, has better control over compute/storage requirements and is relatively more independent of big tech with respect to possible regulatory scrutiny by the legislators. However, with both carriers adopt Open-RAN equipment this year in order to be more “open” to new standards, the task of regulators will not be easy.

That said, telecom operators, in general, suffered from a regression in their business (enterprise or B2B) business, primarily because they were unable to meet service requirements in the same way. on demand and à la carte. fashion as hyperscalers. So, instead of competing with them, it is more profitable to partner with them for private 5G and Industry 4.0. Due to market expansion, telcos are expected to earn higher valuations than current price-to-sales multiples of less than 2x, which are well below those of large cloud providers.

Finally, for Verizon, industry-leading partnerships should translate to better business segment’s annual sales, up from the current level of $31 billion. For AT&T, which also has a cutting-edge partnership with Google, there should be more revenue in its communications segment, but more importantly, migrating its 5G workload to a hybrid cloud could result in a 49% reduction in Capex which helps to reduce its debt by 200 billion dollars.