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IBM and Verizon Team Up in a High-Growth 5G Market

By Leo Sun – Jul 20, 2020 at 8:00AM

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The tech and telecom giants team up to expand their reach and edge computing capabilities.

IBM (IBM -2.08%) and Verizon (VZ -1.03%) recently unveiled a partnership to develop new 5G and AI solutions for industrial customers. This new partnership will mainly focus on "edge computing," which brings processing and storage solutions closer to a device's physical location.

Setting up edge "nodes" closer to a company's IoT (Internet of Things) devices can boost the speeds, processing power, and reliability of those edge devices. The rollout of 5G networks, which can run up to 100 times faster than 4G networks, should complement the expansion of those edge networks.

The partnership between the two tech and telecom giants will combine IBM's AI, hybrid cloud, edge computing, asset management, and connectivity solutions with Verizon's 5G and edge compute technologies. Let's see how this deal could benefit both companies.

A visualization of network connections across a city.

Image source: Getty Images.

How does this deal help IBM?

Over the past decade, IBM struggled to offset the sluggish growth of its legacy IT services, business software, and hardware businesses with its higher-growth cloud businesses. That slow transformation required aggressive acquisitions and the divestments of weaker businesses.

A year ago, IBM acquired open-source software giant Red Hat for $34 billion. Earlier this year, CEO Ginni Rometty retired and handed the reins over to Arvind Krishna, the cloud and cognitive software chief who led Big Blue's strongest growth engines.

When Krishna took over, he said IBM would undergo "two transformational journeys" in the cloud and AI markets, and it would utilize investments, acquisitions, divestments, and partnerships to better align its business with those two markets. Krishna also declared Red Hat's services would help it win the "architectural battle" in the hybrid cloud market, which serves companies that aren't ready to move all their data to public clouds yet.

Partnering with Verizon's Business Group -- which generated $31.4 billion in operating revenue last year by providing wireline and wireless services to large, medium, and small businesses -- clearly complements those plans.

How does this deal help Verizon?

At the end of 2019, Verizon Business hosted roughly 25 million wireless retail postpaid customers and 489,000 broadband connections.

Wooden blocks reading "5G" placed on a laptop.

Image source: Getty Images.

The segment's operating revenue, which accounted for 24% of Verizon's top line, dipped 0.3% for the full year. By comparison, Verizon's larger Consumer business, which generated most of its remaining revenue, posted 1.4% growth.

Verizon attributed the Business unit's sluggish growth to a "secular decline" in its wireline business during a conference call in late January, but noted its higher investments in 5G and fiber technologies would feed a fresh cycle of enterprise upgrades.

The COVID-19 crisis notably hurt Verizon's Consumer unit more than the Business unit, which retained a steady flow of enterprise subscription revenue even as businesses temporarily closed down. In the first quarter of 2020, Verizon Business' revenue dipped 0.5% year-over-year, which outpaced its 1.7% drop in its Consumer revenue.

Partnering with IBM, the world's third-largest cloud provider by annual revenue and the top hybrid cloud provider with over 2,200 clients, could strengthen Verizon's Business segment as the Consumer business continues to face unpredictable macro headwinds.

A win-win deal for both companies

IBM and Verizon's partnership expands the former's reach while improving the latter's technology. It will also enable both companies to profit from the long-term growth of the edge computing and 5G markets, as well as the upcoming "fourth industrial revolution" in automated smart factories. 

Grand View Research estimates the edge computing market will grow at a whopping compound annual growth rate (CAGR) of 37% between 2020 and 2027, and for the 5G services market to grow at a CAGR of nearly 44% from 2021 to 2027.

However, the partnership between IBM and Verizon isn't exclusive: IBM inked a similar hybrid computing deal with AT&T, and Verizon signed a 5G and edge deal with Amazon. AT&T also signed a similar 5G and edge deal with Microsoft. All these companies are spreading out their bets, but the rising tide of 5G, edge computing, and smart factory upgrades could lift all their boats as they become more tightly tethered to each other.

 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon and AT&T. The Motley Fool owns shares of and recommends Amazon and Microsoft. The Motley Fool recommends Verizon Communications and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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