Data Center Outsourcing: Rise of the Reseller
After a period of frenzied acquisition of data center facilities, as well as development of data center and hosting service and asset portfolios by telecom operators, several big carriers suddenly seem to have gone a bit cold on the idea of delivering data center services. It has been widely reported in the press that AT&T, CenturyLink and Verizon are considering outsourcing their data center businesses. It is also apparent that indifference to data center investments has not been limited to the U.S., with some operators in Europe and Asia also divesting or planning to divest assets.
But what is going on is complex. Operators all have different motivations for considering divestments. They have been caught in the grip of several competitive and technological forces that have made it much harder to compete effectively in the provision of data center services. These include massive investment by heavyweight players determined to win market leadership of the data center and cloud computing businesses at all costs, evolution of the technologies being put into data centers, changes in the types of services enterprise customers want to buy (and who they are keen to buy them from) and changing opportunities elsewhere within telecom operators' own businesses.
Telecom operators may have thought that large-scale investment in data centers would offer a route to market that would enable them to capture both the cloud and telecom business of large enterprise customers. In fact, data centers have proven to be a route to reaching those customers, but that route has not opened up in the way operators would have wanted. Enterprise customers have often been choosing to use data centers offering a wide choice of telecom companies rather than those with a single provider; this serves to increase competition and drive down the prices of telecom. Data centers have become marketplaces rather than monopoly outlets. This reflects a wider trend in the data center market.
As with outsourcing of the management of other network systems, though, there is a wide divergence of views worldwide about what an operator should consider core business, about what is strategically important and, hence, what needs to be owned and operated in-house and what can be entrusted to, or leased from, a third-party supplier. There are many large telecom operators continuing to invest in full ownership of their data center service stack. These vertically integrated providers offer everything from the property through managed hosting to the cloud services and enterprise application management.
Use of third-party partners is already quite common amongst smaller carriers. AT&T, Tata and Verizon are really the first heavyweight carriers to have either chosen to follow this path or to have publicly admitted they are considering it. This means that while we will see the rise of the reseller, this will not be the sole business model used by carriers to compete in the data center market.
Data Center Outsourcing: Rise of the Reseller examines the data center investment and service strategies of the world's biggest telecom operators. It reviews the trends shaping the data center industry and analyzes how the value chain is evolving. It also profiles a selection of leading carrier-independent data center operators and data center solution providers – many of which have benefited from carriers' data center outsourcing decisions. The report pinpoints what they have to offer to telecom operators considering reducing their activity in the data center and hosting businesses.
The term data center outsourcing is used in a very generic sense by the technology media. In fact, "data center services" actually encompass several offerings, as shown in Figure 1. At its most basic level, the provision of data center services includes the supply of suitably provisioned real estate – buildings in the right locations, with adequate power, cooling systems and racks – so that customers can colocate their equipment. Physical security is also a vital piece of the service proposition.
Data Center Outsourcing: Rise of the Reseller is published in PDF format.
Over the years, telecom operators have gone through several periods of market change; and each time the industry has evolved, carriers have been forced to reassess what is strategically important to them. This has resulted in waves of outsourcing as some carriers (but never all of them) have decided that they don't need to operate their own billing systems, or to run their IT, or their network operations centers (NOCs). In some cases, they don't need to run their own networks at all. Some have decided they can effectively compete by reselling third-party IT services; others have felt they need to be IT systems integrators with strong internal IT capabilities.
The latest wave of change to cause carriers to reassess what they are doing has been the shift to cloud computing. That shift has happened quickly. In a matter of four or five years, enterprises have migrated large numbers of their systems and applications into the cloud. Operators sought to take advantage of this trend by investing in data center facilities. They acquired data center operators, and they started building data centers themselves. Their ambition was to sell their enterprise customers the cloud applications and services they wanted to buy, the facilities to remotely host and support those cloud applications, as well as the networking services needed to run applications from remote locations. The idea was to sell a full stack of services to what would become a captive audience.
But competitors had other ideas. Amazon.com Inc. (Nasdaq: AMZN), Google (Nasdaq: GOOG) and Microsoft Corp. (Nasdaq: MSFT) started making massive investments in order to dominate cloud services. Rival data center operators started promoting cloud marketplaces based around key locations with the choice of access to many carrier networks. Major IT providers like HP Inc. (NYSE: HPQ) and IBM Corp. (NYSE: IBM) started promoting best-of-breed private cloud solutions combined with public cloud services using Amazon, Google and Microsoft. At the same time, network requirements began to change, and carriers realized they would begin to need data center locations in many more places -- often closer to customers -- and that their existing facilities were not always optimal. Meanwhile, customers started to buy best-of-breed solutions (in part wanting more flexibility) more often than vertically integrated offers.
All of this has led several carriers -- most notably recently AT&T Inc. (NYSE: T), Verizon Communications Inc. (NYSE: VZ) and CenturyLink Inc. (NYSE: CTL) -- to reconsider whether data center ownership, or the provision of data center services using internal expertise, really is a core part of their business. The idea of "outsourcing" data centers is very much front-of-mind, offering the potential to free up cash, increase the spread of services that carriers might offer and even to improve investor returns. But the idea of "data center outsourcing" covers a multitude of services and strategic options, and as before, outsourcing itself is not an option that appeals to all players in the market. Some are still investing heavily.
Heavy Reading's latest report, "Data center Outsourcing: Rise of the Reseller," examines the data center investment and service strategies of the world's biggest telecom operators. It reviews the trends shaping the data center industry and analyzes how the value chain is evolving. It also profiles a selection of leading carrier-independent data center operators and data center solution providers -- many of which have benefited from carriers' data center outsourcing decisions. The report considers what they have to offer to telecom operators considering reducing their activity in the data center and hosting businesses.
— Simon Sherrington, Contributing Analyst, Heavy Reading