The bet 10 years ago was that the telcos would rule — even drive — the IT-as-a-service market, since they already had the networked customer base, the subscription billing processes and tools, data center capacity, and in some cases global scale. But it didn’t happen. Most of them got out before the xSP market collapsed, or turned over operations to a partner. So why should it be any different this time?
An Ovum study from last year supports this skepticism — more than 50% of the CIOs and IT managers surveyed said they would not consider a major telco for cloud computing services. But Ovum also noted that in a market where telcos need to build credibility, early entry could be an advantage. Last week’s $3.2B acquisition of Savvis by CenturyLink gave more proof that the telecom players, past be damned, are serious about cloud computing. They see a market with the same growth potential that Wikibon recently illustrated in this infographic.
The Savvis buy marks the third major cloud-related acquisition by a U.S.-based telecom/cable company this year, following Verizon’s purchase of Terremark and Time Warner’s acquisition of NaviSite. Going back a little further, Windstream acquired Hosted Solutions, a regional data center and managed hosting provider, late last year. (Note that CenturyLink had already acquired telco Qwest before the Savvis deal). AT&T and Earthlink, among others, are regularly discussed as potential buyers.
In the CenturyLink/Savvis call around the announcement, management noted the following:
- Customers are increasingly demanding cloud services with network services.
- The deal provides increased scale for Savvis, with the financial resources and backing to take their business global.
- Looking at Qwest and Savvis combined, more than 50% of revenues come from business customers.
As it was 10 years ago, the potential for these players to build substantial cloud computing businesses is there—and we expect more M&A activity to follow.
Step Right Up
Wall Street began to look at the major managed hosting firms awhile ago as cloud investments, even though their actual cloud businesses, while growing, are minimal. The remaining hosting firms won’t be getting cheaper to acquire anytime soon, and given the current environment we can expect one or more of the following to be snapped up within the next 12 months:
Rackspace: Revenues of $781M in 2010, current market cap at $5.34B, with cloud services reported at about 15% of total revenues, and a large managed hosting business. Launched the OpenStack open-source cloud initiative with NASA. It will be offering cloud services to Asia-Pacific customers later in the year.
Equinix: Revenues of $1.2B last year, current market cap at $4.56B. Currently it operates 90 data centers in 11 countries in North America, Europe, and Asia-Pacific. Cloud revenues appear to be minimal besides providing co-lo space to other cloud players. Partners with OpSource (see below) around cloud.
Internap: Revenues at $244M in 2010, market cap at $364.4M. Cloud business is minimal today. Focuses on co-location and managed hosting.
OpSource: Privately-held, offers managed- and cloud-hosting services. Founded in 2002, with operations in California, Virginia, UK, Ireland, and India.
Also in the Running…
Last year IBM and Dell each acquired small cloud-integration companies (Cast Iron and Boomi, respectively) with products designed to make it easier for customers to transfer data between cloud-based and on-premise applications. We see other young and start-up cloud-related firms, all privately held, as possible acquisition targets, and not only for telcos:
Nirvanix: Founded in 2007 and offers private and public cloud storage services. The privately-held company has gone through significant management changes in the past year and appears to be growing.
Joyent: The software-and-services firm, founded in 2004, has developed a complete cloud software stack and also runs its own public cloud service on that stack. It offers its data center software to any company that wants to build a cloud.
NephoScale: Launched in January, the company offers multitenant cloud and single-tenant dedicated server services, object-based cloud storage and hybrid cloud hosting.
GoGrid: Launched in 2008, GoGrid offers IaaS services including dedicated hosting and cloud hosting. Operated by ServePath, its parent company.
Enomoly: Founded in 2008, Enomoly provides self-service portal and automated application provisioning technology to cloud service providers.
Cloudscaling: Launched in 2006, the company delivers consulting services around cloud as well as software.
Cloud.com: Founded in 2008, Cloud.com offers an open-source platform for launching either public or private IaaS.
High-Touch for Enterprise Customers
Whatever M&A activity follows last week’s purchase, as EMC’s Chuck Hollis and others have noted, selling cloud services to enterprise customers will be a high-touch business for some time to come.
High-touch relationships with enterprise customers has not been an area where most telcos have thrived in the past. Whether the telcos buy their cloud businesses or build them out, they may be better off running them as separate units, as Hollis suggests, and finding partners or buying a consultancy that can provide the cloud pre- and post-sales advisory services that some enterprise customers will need for this kind of migration. HP has reported, for example, that its new Cloud Business Readiness consulting offering, designed to help customers plan out a cloud strategy, is getting good traction. This is a part of the toolkit that the telcos have never really had in trying to sell IT-as-a-service. To miss this point could lead them down the same road they traveled 10 years ago.
Action Item: Businesses need to evaluate which of their workloads (if any) are appropriate for public cloud carefully and understand in detail the advantages and disadvantages of this migration. With the cast of service providers currently in flux, customers will need to carefully compare SLAs, pricing, customer support, geographic coverage and security issues before choosing a provider or providers. In the current environment, they should also be prepared should their chosen provider get acquired or acquire another provider.
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