In 2011 we saw huge shifts at the border between telecom and internet infrastructure, as telecommunications companies of all colors and stripes took action to gain a foothold in cloud-based services. The word ‘cloud’ may be an over-used, under-defined buzzword, but it is now quite clear that the revolution that lies underneath it is quite real. As the telecom industry transforms in response we are seeing two quite distinct flavors emerge that in 2012 will continue to diverge.
Does the cloud favor an ecosystem based on vertical or horizontal integration? That is the ultimate question here, the one that next year will bring clarity to.
Vertical land grab
Most of the largest telecommunications providers have always seen every industry they like as one that ought to be vertical, and have moved aggressively to bring everything in-house. Verizon’s purchase of Terremark, CenturyLink’s purchase of Savvis, and Windstream’s purchase of Hosted Solutions and also PAETEC’s datacenter/cloud business and nationwide presence have all been aimed at that goal. Each hopes to be able to offer enterprise customers of various sizes everything from hosted applications to VPNs to backup to fiber access, thus obviating the need for any intermediaries at any point in the process.
But it’s not just the big boys that think this way. Enterprise-focused CLECs of various sizes are looking to do the same thing. cbey has been betting on its ability to grow beyond mere bandwidth and VoIP, and others have made similar moves. With enterprises moving applications and functionality into the cloud, they hope to gain marketshare while that revenue is up for grabs.
Horizontal dreams of differentiation
The other school of thought is that for a long time after the bubble and the ensuing telecom nuclear winter many bandwidth products were thoroughly commoditized, with few opportunities for differentiation from one provider to the next. The new breed of cloud services follows the financial low latency fad in bringing back that differentiation. Not only is latency important once again in connecting customers to their clouds, but the many types of connections and network designs that customers are raising the profile of the network engineer once again.
This is the domain of the bandwidth specialists, interconnection guys, and the modular data centers, e.g. Zayo Group (news, filings), abvt, tinet, Telx Group (news, filings), Cologix (news), etc. They have been actively talking up the importance of the connectivity between the enterprise and the cloud and between the various clouds themselves. What it really represents is something that nobody wants to say too loudly for fear of jinxing it: the potential reincarnation of a vibrant wholesale bandwidth business market. You remember the wholesale bandwidth business right? The one that has been largely left for dead for years now, with even Level 3 now putting much so emphasis on the enterprise side of things. But the difference now is that the cloud brings a wider range of enterprise customers under what would formerly have been the wholesale umbrella. Serving a diverse, horizontal cloud-based ecosystem aimed at the enterprise is precisely what the old wholesale dreams envisioned – just a decade later than those visionaries of a decade ago might have hoped.
2012 will see the battle lines clarify
Which is the stronger model? Vertically integrated telecommunications giants serving more products to the enterprise, leaving Google and its OTT brethren to the consumer and to web-based advertising? Or a wider variety of horizontally oriented tech companies serving more specialized product sets over differentiated bandwidth pipes in neutral colocation facilities with advanced interconnection fabrics? What sort of cloud services do enterprises really need, and what sort of supplier relationship do they want? These questions won’t be settled in 2012, but the underlying fundamental choices will become much clearer by next year this time.
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Categories: CLEC · Cloud Computing · ILECs, PTTs
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What Do yu think XO will do in 2012?
Well, if they were a baseball team and I were the general manager, I’d call it a ‘rebuilding year’ when asked by the press.
I agree but I am not sure they have the fire in their belly anymore. The old Dialtone voice services are a thing of the past. Voice is not where the money is. I have to agree with the direction of the comments and that is Ethernet solution with large amounts of bandwith on demand is the new mantra for this industry.
Very astute post, Mr. Powell. Let me offer a few thoughts.
1) Nearly every person in the United States will consume more bandwidth in 2012 than they did in 2011. And nearly every business will chew through more as well. In both cases, it is not a little more, it is a lot more. Not only will they use more, but it will be more important in their overall lives. Though an obvious point, it is profound.
2) The huge industry we call telecom has room for many winners… and room for multiple types of strategies… therefore, it is not “wholesale versus retail” or “vertical versus horizontal”…. there is some room for each…
(continued)
3) The number of fiber based telecoms has shrunk dramatically via consolidation over the past several years. I believe we all under-appreciate (from a valuation perspective) the combined effects of “right-sizing” suppliers in a “bandwidth hungry” world. Those who offer bandwidth are positioned to make a solid return for their investors.
4) Execution matters. I have primarily worked in telecom, but my sense is our industry is much more complex than most. Even if strong tailwinds are behind us (consolidation/bandwidth growth), poor execution is a risk. Management teams must PROVE they know how to execute in a way that makes an appropriate return for their investors.
5) Perhaps most important point is this: what is the “cloud”? Cloud usually refers to Cloud Storage or Cloud Computing. I believe there is another type of cloud… the “Ethernet Cloud”… it is the cloud based connectivity between the many places that bandwidth needs to interconnect for those who don’t want to use the public Internet… The Ethernet Cloud will be every bit as important as Cloud Storage or Cloud Computing.
As the “ethernet cloud” evolves, the infrastructure companies with the best fiber footprints and with the most strategic current and future cloud sites/data centers/server farms on net will be in the best position to enable the ethernet cloud!
Ask not what problem Service Providers are trying to solve but rather what customer challenges exist in the management of infrastructure and internal service delivery for the delivery of information technology management services to be consumed by internal and external customers and you will see why cloud or network based services become more viable and thus why the adoption rates are occurring as they are. Moreover as service capability continues to be made available spanning new areas like virtualization and idendity management you will see more and more “consumption” occur.
The delivery of IT services today is tremendously different that when CIO’s were required to deliver services in years prior. Sure there’s a tremendous amount of similarity in some infrastructure service – business continuity planning/disaster recovery, logistics, internal controls, etc …. but there’s a whole new paradigm shift in services that are transforming the way businesses execute. The concept of virtualization whereby an enterprise can perform what we termed mainframe rehosting in the early 2000’s into a “P2V” (physical server to virtual instance), the introduction of anticipatory engaged communication services, the execution of mobility and identity management – all will play a critical part in the delivery of services going forward to achieve and realize “on demand” dynamically engaging communication services. BTW, these will drive significant bandwidth consumption … whether via wireless to backhaul nodes, distribution of large database snaps across WAN’s, video on demand, etc.
Finally – yes, it is true that one can intimate that carriers are looking to change the dynamics of their revenue streams by creating services that are both vertically and horizontally integrated across multiple service domains. The reason this is being done is not only due to my esteemed industry colleague Dan Caruso mentions above and achieve more wallet share but also something a little more strategic in that by creating more compelling services that are stickier it becomes more difficult for such customers to migrate away. Said a different way Service Providers are changing the dynamics of how and why businesses acquire from a “value buyer” approach to a full service enablement approach. The issue with this is that only the biggest Service Providers can afford to take this offensive posture potentially leaving open the door for smaller, more innovative, flexible, hungry and dynamic providers (ASP, SaaSP, IaaS, PaaS, etc) to steal business. Does that matter or is it intentional by the players to allow this from happening? I will let you be the judge of that ……
A few final comments ….there is no doubt that infrastructure is compelling as Dan Caruso and John Purcells have demonstrated in the performance of their respective business resulting in strong valuation or the sale of said business and achieving an EBITDA multiple that rewards investors who supported the initial business investments. More importantly, however, and notably absent is a statement regarding “culture”. In my opinion culture is likely more important than the 4th point above regarding execution as without a strong, well defined, reinforce culture nothing else matters. It is my opinion strong execution is a result of a well defined corporate culture that enables all parties from executive leadership to front line employees to participate and be engaged in the success of the company. Without this you can be successful for sometime but in time the fragility of a business will be impacted if the culture is weak even though you may have strong management that have demonstrated prior execution success.
Happy Holidays.
Correcting last paragraph …. I lost my train of thought when the culture idea popped in …. What I meant to suggest about infrastructure is it will always play an important role in the service provider / strategic integrator / etc environment. The challenge is to be highly disciplined in infrastructure and do it well otherwise your value to customers become less desirable. You have to either create innovative solutions that are constantly transforming or focus on a narrow set of objectives and execute with the corresponding corporate culture and management focus to stay on task. Anything leads to negatively impactful end results likely stratifying results.
Grant Lewis, you name does not ring a bell. Please tell us a little about yourself.
I agree with your point on culture. It is impossible to sustain good execution if an excellent culture is not the foundation.
@Dan I have been around for quite some time though I’ve not enjoyed the success which is admirable btw that you and John have. Our paths have crossed though only due to similar inorganic transactions. Happy New Years…..best GL.
Dan Caruso and Grant Lewis, you both bring good things to my thought processes when you speak about changing paradigms in a bandwidth hungry world.
With respect to the cloud, at least to the extent of interacting with CDN’s, Dan Rayburn had an excellent article out recently on the Akamai strategy with Cotendo, but I digress slightly.
Most recently, however, there came this phantom named Enron_Hubbard, or maybe Enron-Blowhard, who appeared before a December, 2011 option expiration, and posted what he said was a partial Oppenheimer report excluding their mathematical assumptions along with certain predictions that consolidation still remains insufficient with the big four players in the “long haul” space specifically(T, VZ, S, and LVLT), and that there are at least ten years left with fiber “GLUT CONDITIONS” before their favorite carrier who they believe needs to finish the consolidating, Level 3 Communications, is complete.
I have my scouts out looking for this full report, to either revel it for its brilliance, or debunk it for the FUD it has already supplied those speculators who may have been more bullish at or near the December option X date as well as the bearish follow through into year end.
I understand that not all fiber is created equal, be it long haul or metro, but I wonder if you two have seen this piece of work by these illuminaries or if you care to comment on the merits of such broad statements excluding supporting data tied to the “long haul” bandwidth space? tia
Wow, some amazing comments here today! Thanks! Carlk, you have email.