Windstream's data center sale allows it to focus on broadband, fiber networking strategy

Following months of rumors, Windstream made it official that it will sell off its data center business to TierPoint for $575 million, a deal that reflects the company's need to focus on its core business, wholesale, and consumer services strategy.

It did not say specifically why it was selling the business, but the deal was likely driven by a few fundamental factors: the cost to run the division and competition from cloud-centric providers. Amazon Web Services (NASDAQ: AMZN), according to a recent Synergy Research report, continued to hold a dominant spot in the cloud infrastructure market, for example.

The sale of these data center assets is important to the future direction of Windstream. By selling off the data center assets, Windstream will get some new capital while reallocating resources to hone in on core initiatives set by CEO Tony Thomas.

Without a data center business to manage, it can pursue its goals to become a broadband and business services company with a focus on three areas: increasing on-net fiber footprint, wholesale realignment, and enhancing broadband speeds. 

Each one of these initiatives is quite ambitious so it's likely that no longer having to manage a data center unit will free up not only capital but teams to carry them out.  

Increasing the on-net building fiber footprint offers a number of advantages for Windstream. For one, it gives the service provider the opportunity to control the customer experience as it owns the circuit that goes to the customer, allowing Windstream to deliver a set of high bandwidth services such as Ethernet and cloud.

The second benefit of the on-net buildout strategy is saving access costs. Although Windstream is an established ILEC with a large copper and fiber network, it still has to rent facilities from other service providers to accommodate businesses at sites where it currently does not own facilities. By building out more on-net facilities, it could save some of the $1 billion in access costs it pays to other ILECs like AT&T (NYSE: T) and Verizon (NYSE: VZ). Initially, Windstream said that it would begin connecting more on-net buildings in five markets.

Windstream is also making changes to its Carrier Solutions team. Led by Joe Scattareggia, who was just promoted to senior vice president of Carrier Solutions sales, Windstream clearly decided that the better way to serve this market would be to have a sales team focused on serving specific verticals such as content/OTT providers, strategic wireless and wireline carriers, cable companies, foreign carriers, and other network operators. 

One service it likely will capitalize on in the wholesale market will be 100G. To further the reach of the 100G network, the service provider plans to build 20,000 route miles and nearly 50 new carrier access points by the end of 2015. This means that it could become a more viable competitor to meet the needs of foreign providers looking to establish a greater foothold in the U.S. market and content providers whose customers' viewing habits continue to consume greater amounts of bandwidth.

Finally, increasing consumer and small business broadband speeds has become a priority as it looks to thwart the rapidly consolidating cable provider market. Windstream has historically faced criticism over its speeds and the reliability of its broadband service, but by adding VDSL2 capabilities and plans for FTTH later this year, it can put some of those questions to rest.

The service provider is also in the process of bringing speeds of up to 100 Mbps to nearly 240 markets in 16 states. In addition, Windstream said during its second-quarter earnings call that is on track to make 50-100 Mbps speeds available to nearly 1 million households and small businesses in more than 850 markets by end of 2015.

The VDSL2 network will serve its existing last mile copper and middle mile fiber networks, but will require the service provider to make new fiber investments and deploy next-gen DSLAMs as well as market the service.

Even when it completes the sale of the data center business, Windstream isn't turning its back on the data center opportunity completely.

It will establish an ongoing reciprocal strategic partnership with TierPoint, allowing both companies to sell their respective products and services to each other's prospective customers through referrals. This structure creates benefits for Windstream and TierPoint's customers alike. Windstream can continue to bundle its growing set of IP-based Ethernet and cloud services with the data center services. It will also gain a channel from which it can sell business through TierPoint's customers, a factor that could potentially create new revenue streams.

While the data center business is an attractive proposition for service providers to pursue -- particularly to accommodate the growth of cloud services -- in Windstream's case it became an asset that will do better in the hands of a company like TierPoint that is a specialist in this service set.--Sean

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