Carriers make their play in the cloud

As telecoms buy up cloud providers, they look to enter the increasingly crowded cloud market

The wave started last year when Time Warner Cable, the telecommunications company serving much of the Eastern United States, spent $230 million to purchase NaviSite, a provider of cloud services for businesses.

Two months later, in April, CenturyLink, the southern telecom, bought Qwest for $12.2 billion worth of stock. That same month, Verizon responded by purchasing Terremark, the cloud infrastructure-as-a-service provider. CenturyLink followed by purchasing Savvis, another IaaS provider, for $2.5 billion.

It's been a busy past 18 months for domestic telecommunication companies that have aggressively entered the increasingly crowded cloud marketplace. But what's the core strategy for these telecoms? And do they really have a chance of competing against industry leaders?

Telecom M&A chart

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"[The telecoms'] core business is changing around them, and the cloud is a very natural place for them to go," says Chris Drumgoole, senior vice president of client services for IaaS company Terremark, which is now owned by Verizon.

As telecoms iron out their cloud strategy, experts say they need to move quickly. Revenues from their traditional voice offerings are eroding and competitors are moving quickly to diversify their offerings and attract new customers. Amazon Web Service, Microsoft Azure and Google have all reduced prices on their cloud offerings in the past month, for example.

Telecoms do offer some advantages -- namely, they already have a large nationwide network infrastructure. But some experts believe telecoms don't have a chance to compete against market leaders such as AWS, IBM and HP, and that telecoms instead need to focus on new value-add services they can provide.

"This is a very new direction for the carriers who have in the past played it close to the vest," says Bob Rosenberg, an independent analyst who has been tracking telecommunications companies since 1990.

The carriers are "gobbling up data centers," he says, which in a sense amounts to a game of catch-up. IaaS competitors already own massive IT infrastructures that telecoms are now trying to build up themselves. But there is one area where telecoms have an edge: "They have the wires," Rosenberg says.

Armed with their newly acquired data centers, Rosenberg says the natural move is to play up the security and network infrastructure strengths their legacy wired networks inherently bring. From an end user perspective, that appeals to customers looking for low-latency connections for large amounts of data transfer.

"As providers of infrastructure services, we have to be able to improve the value proposition for customers," says Bryan Doerr, CTO at Savvis. "Telecoms help us do that. We can leverage the scale, capital efficiencies and combine them with our expertise." One significant differentiator he sees as now being part of CenturyLink, he says, is security. "It's about more than just hosting now; it's about having a network that can connect these enterprises, which is a big part of the security story," he says.

But other analysts say that instead of competing in the IaaS field, telecoms should find their own niche. "Competing on a like-to-like basis on IaaS is not a winning strategy," says Dan Bieler, a telecom industry analyst at Forrester.

Telecoms, he says, have an opportunity to provide value-added services wrapped around their strength, which is connectivity. Bieler believes the best play in the clouds for telecoms is to offer a platform for hosting software programs on their infrastructure. This could include enterprise resource planning (ERP) and customer relationship management (CRM) services, plus additional complimentary services related to connectivity between multiple locations, data transfer security and software management on top of that.

For example, a telecommunications company could offer to host an enterprise's Oracle or SAP offering on its database. "Then, they can create a whole bundle of services around connectivity, application management, up to and including device management as part of a range of offerings," he says. Vendors -- the Oracles and SAPs of the world -- have an incentive to work with telecom providers because it spreads their products out into the market further, he says. End users don't have to invest in the infrastructure to host the applications on site, and can take advantage of the efficiencies the cloud offers, he says.

On an ever broader scale, telecoms may be able to provide an entire unified communication platform, Bieler suggests. They can offer enterprises an opportunity to purchase communications systems, and use their existing infrastructure to connect a range of devices, from phones to mobile devices and tablets.

Some telecoms have already recognized the opportunity. John Potter, vice president of as-a-service solutions for AT&T's business solutions division, says the company doesn't want to just compete on the IaaS-level. Instead, AT&T wants application developers to write programs that run on AT&T's network.

"There is an opportunity for developers to work with us, on our platform, leveraging out toolsets and capabilities to make a truly robust application," Potter says. And, while AT&T is making a play in the platform market, it is also making it easier for enterprises and SMBs to connect into the AT&T offerings. Earlier this year, for example, it announced that enterprise private clouds running VMware can more easily integrate with the company's public cloud offering.

Other telecoms are putting their eggs in the IaaS basket. Drumgoole, the Terremark official, says IaaS is a natural fit for Verizon because Terremark is already a strong player in that field. He expects Verizon, CenturyLink, AT&T and others to "opportunistically" look at software as a service and platform as a service offerings.

Bieler says telecoms are in a good position because they are seen as trusted players and have an existing set of customers. "You can't underestimate the soft factors these companies have going for them: integrity, reliability, security," he says. Plus, another underestimated feature of the telecoms, is the massive salesforce they already have to go out and sell these systems.

Still though, Bieler says telecoms need to move quickly on to their new strategy, be it a straight IaaS play, or a more nuanced platform offering as he described. Telecoms, he says, rely on voice for a large portion of their revenue and cash flow now. Those revenues are eroding, so they need to find a way to replace that cash. The cloud, he believes, could be the answer.

This article originally appeared at NetworkWorld.com. Network World staff writer Brandon Butler covers cloud computing and social media. He can be reached at BButler@nww.com and found on Twitter at @BButlerNWW.

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