CenturyLink's $3.2 billion blockbuster buyout of cloud computing provider Savvis Wednesday continues the trend of larger service providers, carriers and telcos getting into cloud computing though acquisition.
The cloud acquisition gives CenturyLink, the nation's third-largest telco, Savvis' foothold as a hosting and cloud computing provider and enables it to bulk up its presence in a cloud computing market that Forrester Research predicts will reach $241 billion come 2020, said CenturyLink CEO Glen F. Post III in a conference call announcing the acquisition. CenturyLink has agreed to buy Savvis for $2.5 billion in cash and stock and to assume or refinance Savvis' $700 million debt.
“We are creating a premiere managed hosting and managed services provider," Post said, adding that Savvis will operate as its own entity.
CenturyLink's buy into the cloud with Savvis puts it in the company of other service providers, telcos, carriers and cable companies that have put their money where their mouths are in scooping up cloud computing players. Verizon Communications scooped up Terremark in a $1.4 billion deal that closed earlier this month. And shortly after, Time Warner Cable purchased cloud hosting provider NaviSite in a $200 million buyout plan.
Post said that the cloud services and managed hosting businesses are expected to have an annual growth rate of 20 percent for the next few years and adding Savvis to the mix will give CenturyLink a bigger stake in that market.
"By combining with a managed hosting and cloud services leader, we will be able to accelerate organic growth plans," he said, adding that CenturyLink will be able to tackle the management and cloud needs of its growing cadre of enterprise customers.
Meanwhile, Savvis CEO Jim Ousley said it will benefit from the capital backing from CenturyLInk as it shifts toward offering more managed services and targeting the cloud. Ousley said Savvis generates 34 percent of revenue from managed services, 38 percent from collocation and 28 percent from network services and 83 percent of its business is in North America.
The deal is expected to close on the second half of this year.
For industry watchers, CenturyLink's entrance in the cloud market signals a changing tide and is a harbinger for an era where massive service providers own the cloud.
"It just makes sense that the service providers would be the first to capitalize on the cloud," said Vanessa Alvarez, a Forrester Research analyst. "At the end of the day, they know how to run networks and that's the foundation of the cloud."
Bulking up their cloud presences through acquisition is the safest method for service providers and telcos, Alvarez said, as the cloud providers they're buying already have established client bases and the infrastructure to support them.
NEXT: Cable Companies, Telcos Are Cloud Of The FutureAdding St. Louis-based Savvis to its ranks will enable CenturyLink, traditionally a telephone carrier, to scale globally as a managed hosting and collocation provider, it will also fuel CenturyLink's ability to offer managed hosting and cloud services. Post said that, combined, the companies will operate 48 data centers in North America, Europe and Asia with more than 1.9 million square feet of gross floor space; a national network of 207,000 route miles; and a 190,000-mile global access network. Together CenturyLink and Savvis will boast a customer list flush with Fortune 500 and Fortune 1000 companies.
"Cable and telcos, that's the business model that the cloud fits," said Jeff Hine, analyst with Enterprise Strategy Group. "They know how to take massive infrastructure and deliver it by the drip."
Additionally, adding smaller cloud and hosting providers to their arsenals gives large providers the ability to move both up and down market commercially, and also add new services with which to target consumers. Hine said he foresees telcos offering "grand slam" options versus their current "triple play" service offerings by adding cloud computing services to the cable, phone and Internet packages.
"It's going to be interesting," he said. "This is going to shake out in a big way."
Paul Burns, president of cloud analyst firm Neovise, called CenturyLink's Savvis acquisition a smart buy, but was cautious about saying telcos will own the cloud.
"I can't conclude yet that the telcos are going to be the key players here," Burns said, adding that their deep pockets and ability to acquire make a strong case in their favor, as does their ability to offer more services than just cloud. "People are starting to realize cloud isn't just pure cloud."
Paul Hilbert, partner at Englewood Cliffs, N.J.-based solution provider Network Doctor, said he also couldn't determine if large service providers will own the cloud in the future. He said he foresees a mix of the big boys and smaller providers.
"There are going to be a lot more players out there providing cloud services," he said. Hilbert said the bigger companies could drive down the price of smaller providers, like Network Doctor and since many decisions ride on price, that could have a major market impact.
Alvarez said telcos will be the main cloud providers in the country going forward, as long as they can adapt to cloud business models.
"They will be cloud service providers," she said. "Will they be leading? Will they be the best? That depends on if they can change their business models. It's one thing to buy yourself into a market. It's another thing to run it successfully."
NEXT: Where Does The Channel Play In Teclos' Cloud Model?Part of that new model will be embracing the channel. Alvarez said many will adopt an agent model where partners can add value. They can become a broker and be a hands-on resource for end users.
Jeff Hine, analyst for Enterprise Strategy Group, said CenturyLink's Savvis buy and other telcos ramping their cloud efforts has created a sort of "awakening" that the indirect channel is a solid go-to-market for cloud services. That renewed interest in the channel comes after years of service providers being "all over the place" with their indirect sales strategies.
"Over the last year, the philosophy of the service providers has been changing pretty radically from 'we don't need the channel, we can go direct' to 'I think we need channel partners to get to market' and they start putting programs into place," Hine said.
Burns said major telcos like CenturyLink and Verizon have the ability and the reach to have a strong direct play, but wrapping in hosting and cloud would require them to better leverage the channel.
CenturyLink buying Savvis also raises the question of what's next as telcos storm the cloud.
According to Alvarez, AT&T is one major service provider yet to make a massive cloud acquisition. Comcast, too, has been biding its time before striking. It's unclear what cloud providers AT&T or Comcast would target if they get the acquisition jones, but Alvarez said "Rackspace is the next sexy target."
Hine agreed. He said Rackspace could survive on its own and has established a massive presence, which could make it an attractive acquisition target for a carrier to retrofit into its footprint. OpSource and GoGrid could also be targets for telcos looking to add cloud through acquisition.
Another question is where the major vendors will play, Hine said. Dell has hinted that it will become a public cloud service provider in the near future. And HP has vowed it will be a cloud leader. HP and Dell moving into the public cloud space will put them in direct competition with the carriers and telcos and some channel partners.
Burns agreed that Dell and HP may break the pattern with key cloud provider acquisitions of their own as they hash out their respective cloud strategies.
And Network Doctor's Hilbert said the major vendors turning into cloud providers is more of a concern than the telcos, as the vendors have the ability to woo away deals from cloud solution providers.
"My biggest concern is when the Dells of the world get into it," he said.