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Google, Amazon and Microsoft Will Profit Most From 5G, Not AT&T and Verizon

Tomorrow’s always-on, everywhere applications will likely be brought about in the cloud computing facilities of Amazon (AMZN) and Alphabet’s (GOOGL) Google, and Microsoft (MSFT) .

Significantly, they will not be a product of AT&T (T) nor Verizon Communications (VZ) nor of whatever form a combined Sprint (S) and T-Mobile US (TMUS) ultimately takes.

That means the new 5G networks that are being rolled out to consumers this year will be a new opportunity for the cloud computing titans and probably something of a letdown for Verizon and the rest.

For several years now, Verizon and its rival carriers have been talking about how faster 5G cellular will bring all sorts of opportunities to mobile devices and to homes. And that’s likely to be true. With downstream speeds as high as a billion bits per second for mobile devices with a chip from Qualcomm (QCOM) , the dominant vendor in cellular modems, there will be qualitatively different kinds of mobile applications run on smartphones, tablets and other mobile devices.

With lower latency, it will be possible to have video games and movies and other apps do a lot more in the cloud before delivering information to the mobile device. The wireless link makes possible applications that don’t depend solely on mobile capabilities, but that can split computing effort between the device held in one’s hand and the enormous computing facilities at the other end of the computing link.

But who is going to provide those services in the cloud? It is not the telecom operators, who have shown a their usual lack of acumen for services riding on top of their own networks. AT&T’s DirecTV Now video offering has failed to take the world by storm. Verizon’s acquisition of Yahoo! In 2017 for nearly $5 billion has not created a content powerhouse, though it has contributed to the company’s advertising revenues. T-Mobile and Sprint have at the moment even less going for them in providing content and applications to individual consumers.

By contrast, the cloud titans, such as Google, are chomping at the bit to offer services of one kind or another. Google’s recent announcement of a gaming service run in its cloud computing facilities, called “Stadia,” is one prominent example. The service runs the heaviest part of video game graphics rendering on Google’s computers, taking the burden off of mobile devices. That’s just one example; there are a plethora of streaming gaming services on the way, as Annie Gaus has written.

With big investments in data centers to deliver compute power, Google’s cloud, Amazon’s AWS, and Microsoft’s Azure are the new platforms for applications that will run on faster 5G networks. Some of them will be owned by the titans themselves, while some will be owned and operated by clients of the cloud titans who rent the compute capacity to make them possible.

Meantime, the telcos, who have never been adept at running applications for consumers, will have to look to other ways to profit from 5G. First and foremost, they will pursue it as a way to retain their existing base of subscribers, both consumer and corporate, and possibly to poach small numbers of subscribers here and there.

It’s possible that use of the cloud applications from Google and the rest will induce 5G subscribers to buy bigger monthly buckets of minutes from the telcos. Certainly they hope so, but the price-conscious consumer will be slow to increase their monthly bill.

The more likely avenue to riches for the telcos is to poach subscribers from Comcast (CMCSA) and Charter (CHTR) and other cable operators. Taking away the entrenched fiefdoms of cable, which dominate broadband in various regions of the U.S., has been a quest of the cellular operators for years. With 2-gigabit downlink speeds, there is finally a valid proposition for Verizon and AT&T and the others to go to consumer homes and convince them to drop their coaxial connections in favor of cellular broadband.

There’s an even better proposition for the cellular operators in business connections, where wireless means links can be added to offices rapidly instead of the long lead time needed for fixed-line connections.

So it’s not all bad for Verizon and the rest. They still have avenues to profit from their investment in 5G. But the richest services will belong to the younger tech names that control the computing facilities of today and tomorrow. They will skim the cream of the most high-margin, high-value offerings that 5G brings, leaving telcos once again fighting amongst themselves for the rest.