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As telcos consolidate the cloud sector, it’s best to let cloud companies lead the Cloud charge
4 February 2012 by Yevgeniy Sverdlik - DatacenterDynamics
The combination of fast growth in the Cloud-based services space and diminishing revenues from traditional voice services has had a transformative effect on both the telecommunications industry, and hosting and cloud service providers throughout 2011. The transformation occurred as telcos went on a spree, buying up providers of data center services. The year’s mergers ranged in size and geographies: Verizon/Terremark, CenturyLink/Savvis and Windstream/Paetec in the US, and Telefonica/Acens in Spain, for example. But they all had a unifying feature: the Cloud.
Verizon said its purchase of Terremark would boost its cloud strategy, and CenturyLink said absorption of Savvis would make it a global colocation and hosting player, as well as “accelerate” its cloud capabilities. Windstream bought Paetec about three months after the latter company launched a cloud portfolio and an infrastructure expansion program. Telefonica cited Acens’ pioneering role in developing cloud solutions as one of the reasons it bought the Spanish provider in June.
For telcos, such deals are either a way to buy into the Cloud market or to add features to existing portfolios of cloud services, according to Kelly Morgan, senior analyst at Tier1 Research.
“Some of the telcos are belatedly realizing that their customers are putting more and more of their workload into the Cloud – requiring network connectivity and outsourcing their data center [or] hosting needs,” Morgan says. “Having their own hosting [and] cloud firms allows telcos to get in on the action and keep more of the traffic on their own network.”
Cloud is also an opportunity for telcos to compensate for falling revenues from traditional voice services, Morgan explains, while leveraging assets they already own. “They are also looking for ways to take advantage of their network and other assets,” Morgan says. “Originally, telcos had data center space to store their equipment, so they often know what’s involved in running a data center.”
Data center and cloud services capabilities give large telcos a way to offer comprehensive packaged solutions to businesses. Such a package may, for example, include traditional phone and internet services, as well as email and web hosting.
One of the biggest and most high-profile examples of the consolidation trend has to be Verizon’s acquisition of Terremark — a US$1.4bn deal that closed in April. Less than three months after the merger’s completion, Verizon announced an “expanded and enhanced” portfolio of solutions it chose to sell under the Terremark brand. The portfolio includes IT infrastructure, cloud, security and related professional services. The infrastructure services include everything from colocation to managed hosting and enterprise cloud, enabled by Terremark’s platform.
The Terremark deal created a market behemoth overnight out of a company whose presence was already a dominant one. It expanded its infrastructure to 50 data centers around the world, a global network and access to big expansion capital.
This is exactly why many data center and cloud companies have been selling to telcos instead of playing independently and growing organically, Morgan says.
“Hosting/data center firms require a lot of capital, especially data center firms, but also hosting companies when they get big enough to require lots of servers,” she says.
In addition to resources and network connectivity, telcos make the argument that they also provide data center companies with access to larger customer pools. Morgan says one reason for this is it makes selling to a telco more attractive than selling to a private equity firm.
Savvis benefits from having been bought by CenturyLink in a very similar way that Terremark benefits from the Verizon acquisition. This US$2.5bn deal closed in July and, similar to the Verizon/Terremark merger, it brought its data center footprint to 50 facilities in North America, Europe and Asia. Savvis CTO Bryan Doerr says total gross floor space in these data centers exceeds 2m sq ft.
The network and customer-access parts of the story are there as well. “The merger leverages and complements CenturyLink’s existing assets, particularly one of the world’s most capable networks, and its hosting business,” Doerr says. “The merger has opened up new cross-selling opportunities for both Savvis and CenturyLink.”
Letting the innovator lead
The way in which both Verizon and CenturyLink went about integrating the data center services companies they bought was also similar. Both chose to retain the new subsidiary’s brands, allowing the companies to lead the charge on the data center services market.
Agatha Poon, research manager at Tier1, says this was a wise move that “let the innovative company lead an innovative strategy”. In Terremark’s case, it gets “additional resources from the bigger company [while] still being able to direct the Cloud strategy,” Poon says.
CenturyLink has largely let key members of the Savvis leadership team lead its newly acquired hosting business. “Savvis is now officially referred to as Savvis, a CenturyLink company, and is an autonomous managed-hosting entity under the CenturyLink umbrella,” Savvis’s Doerr says.
The merger gives CenturyLink Savvis’s colocation, hosting and cloud offerings that can now be delivered on a global network, providing CenturyLink with access to new international markets, Doerr says.
Other large telcos-turned IT0-service -providers place a lot of focus on targeting the enterprise market with customization on a vertical-by-vertical basis, Poon says.
A good example of this strategy is London-based BT Group. According to Poon, BT tackles the market according to a formula where it goes after four industry verticals across four geographic regions. “Finance [for example] is one of the verticals BT is good at, so it will invest resources to make sure it has a package of services tailored for that vertical,” she says.
In summary, the big players compete on comprehensiveness, geographic reach and niche-vertical solutions.
Not always just a cloud play
The aforementioned acquisition of Paetec by Windstream was a somewhat different deal from Terremark and Savvis acquisitions. The US$2.3bn acquisition of the US provider (announced in August) significantly increased Windstream’s network infrastructure. Paetec’s 36,000 route miles of fiber in portions of 39 states and the District of Columbia made Windstream owner and operator of a 100,000-fiber-route-mile network.
Data centers and cloud are a big part of this story. In May, Paetec launched a portfolio of cloud-based services and announced a nationwide expansion of its data center footprint. The plan included adding 13 data centers by the end of 2012 to the seven Paetec already had.
Paetec’s Cloud portfolio includes virtual and dedicated servers, managed storage and hosted Exchange. Windstream provides public, private and hybrid Cloud, as well as Cloud storage.
Examples above are just a few of some of the most prominent acquisitions that took place in the space. There were some smaller but similar acquisitions over the year. So much activity in fact that Rackspace CEO Lanham Napier’s made statement to Forbes in February that Rackspace was “not for sale”.
Napier told Forbes the hosting and Cloud giant would continue to grow organically, saying he viewed the ongoing consolidation as creating a market advantage for Rackspace, which differentiates itself through its “culture”.
If he is right, this advantage is only going to grow, according to analysts. Poon says she expects the consolidation trend to continue in 2012, which will bring more and more vertical integration.
This article first appeared in DatacenterDynamics FOCUS magazine Issue 19. Haven’t seen it? Click here to register to receive it.