AT&T, Verizon and CenturyLink’s recent data center moves reflect their ongoing shift in offering business services—one that will allow them to focus on becoming managed IT service providers.
First up is Verizon, which has made two important moves in its IT services transition: Selling its data center business to Equinix and then its cloud services business to IBM.
While AT&T has yet to sell off its data center business—one that has not attracted a viable bidder—the service provider recently signed an agreement with move thousands of its large scale internal databases to Oracle’s Cloud Infrastructure.
Similar to AT&T and Verizon, CenturyLink is taking a two-pronged approach to harnessing more IT service power by not only selling off its data center business, but also purchasing Level 3 Communications.
“We closed the sale of our data centers and colocation business on May 1, and we continue to expect to close the Level 3 acquisition by the end of September,” said Glen Post, CEO of CenturyLink, during the first quarter earnings call, according to a Seeking Alpha transcript. “Both of these transactions align with our strategy announced in late 2015 to focusing first on network and taking a less capital intensive approach to complementary offerings such as hosting, Cloud, IT and Managed Services.”
Jefferies said that these companies’ moves are a likely reflection of what analysts said is a realization that they need to get out of businesses that do not reflect their strengths.
“We view these moves by AT&T and Verizon as a continuation of big telecoms moving away from the data center and cloud business, as it is not their core competency,” said Jefferies in a research note. “Oracle and IBM are major tenants of many Data Center REITs.”
Dealing with AWS’ dominance
One of the key challenges AT&T, Verizon and CenturyLink have faced in the data center and cloud services market segments is the difficulty of dealing with Amazon Web Services’ (AWS) dominance. Unlike the telcos, AWS does not have the legacy drag and can focus on selling next-gen cloud and data center services.
Synergy Research revealed in its first quarter cloud services report that there are five major cloud infrastructure service providers that are growing more rapidly than AWS. However, AWS remains well ahead of the pack with an estimated 33% worldwide market share.
The research firm noted that while Microsoft, Google, IBM, Alibaba and Oracle all achieved first quarter 2017 growth rates that were substantially higher than that of AWS, AWS revenues were still larger than the other five combined.
John Dinsdale, VP, chief analyst and general manager for Synergy Research Group, told FierceTelecom that the traditional telcos have lost the cloud war to the hyperscale data center operators.
Cloud centric providers such as AWS, Microsoft, Google and IBM have gained the upper hand in the cloud services market.
“It’s not quite game over, but telcos are mostly having to retreat into supporting roles for AWS and Microsoft—providing cloud on-ramps and being local business partners,” Dinsdale said. “In cases where U.S. telcos have made big acquisitions in data center-oriented operators, the results have been far from satisfactory and those telcos have either pulled back or are investigating ‘strategic alternatives.’”
Growing IT revenues, partnerships
Now that these companies have sold off or transitioned their assets to another provider, they claim they can focus on building new IT service revenues. A key element of this transition will be to either partner with IT specialists and data center providers or acquire IT provider specialists.
As part of its data center sale, CenturyLink will maintain a 10% equity stake in the VC consortium’s newly formed global secure infrastructure company, Cyxtera Technologies. The telco will continue to offer colocation services as part of its product portfolio.
CenturyLink has been also enhancing its IT services acquiring specialists in areas like SAP. By acquiring SEAL Consulting, the service provider will offer its customers greater capabilities implementing SAP solutions for customers across manufacturing, retail and consumer products industry verticals.
“Our IT Services revenue, which is primarily driven by IT consulting, cybersecurity, IT services management and integrated SAP solutions is growing,” Post said. “While we do not necessarily expect to be the industry leader in IT services, they are significant value-add to our Enterprise network offers and they open the door to opportunities to build stronger relationships with Enterprise customers.”
AT&T and Verizon are taking similar approaches.
Through its agreement with Oracle, AT&T is migrating thousands of existing Oracle databases containing petabytes of data plus their associated applications workloads to Oracle Cloud. For AT&T, the value is that they can offload functions from AT&T global access to Oracle’s cloud portfolio offerings both in the public cloud and on AT&T’s Integrated Cloud.
Verizon may have sold off its data centers to Equinix and its cloud network infrastructure to IBM, but Verizon agreed to work with IBM on a number of strategic initiatives involving networking and cloud services.
George Fischer, SVP and group president for Verizon Enterprise Solutions, said its agreement with IBM allows it to “become one of the world's leading managed services providers enabled by an ecosystem of best-in-class technology solutions from Verizon and a network of other leading providers."
This transformation is primarily about recognizing two things: Scaling a cloud and data business has many challenges, so these companies are perhaps leaning more toward a consultative, best-of-breed approach. While service providers will still likely trail AWS, they can use their established enterprise customer base to push a less capital intensive IT services strategy. — Sean | @FierceTelecom