Verizon, Time Warner Acquisitions: Harbingers For Change, Cloud Consolidation

Verizon's $1.4 billion blockbuster buyout of cloud infrastructure darling Terremark last week sent shockwaves through the cloud computing industry, illustrating once and for all that major telecom players are looking to get into cloud computing by any means necessary.

And less than a week later, Time Warner Cable made no bones about its cloud computing plans by scooping up cloud hosting and services company NaviSite for $230 million to bulk up its cloud computing services offerings.

Two mammoth cloud computing acquisitions by traditional service providers in less than a week is a true sign that these providers are taking the cloud seriously and a foreshadowing signal that more cloud consolidation is on the horizon. They also highlight a pivot-point in the cloud computing market where major providers are pressing hard to take top billing in the cloud services game.

"It validates the inevitability of this shift [toward the cloud] and the desires of all players in this figure out what their role is going to be in this world," said Ryan Nichols, vice president of solutions marketing and strategy for San Mateo, Calif.-based solution provider Appirio. Nichols added that Verizon acquiring Terremark and Time Warner Cable buying NaviSite show that it's important to every type of player -- telcos, systems integrators, solution providers, and more – to investigate the cloud market and that they're "waking up and realizing how different it is."

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And the acquisitions will prompt a new inflection point in the market.

"The Verizon deal really does change the market in a few notable ways," said Reuven Cohen, founder of cloud platform vendor Enomaly and cloud capacity clearinghouse SpotCloud. "In terms of the biggest IT players such as HP and IBM, services have become a critical part of their revenue and earnings. The traditional service providers such as Verizon and AT&T are being forced to compete in both broad customer services -- mobile -- where their economies of scale limit additional competitors but also in areas where the economies of scale have shifted to economies of flexibility and efficiency -- cloud. Meaning, Terremark is able to compete not because they are bigger or have deep pockets, but instead because they are more nimble and more efficient. In a lot of ways Terremark hit to the core of this transformation: big and centralized versus small and efficient."

Verizon's acquisition of Terremark and Time Warner Cable picking up NaviSite is a sign that telcos and cable providers are getting serious about their role in the cloud, said Forrester Research analyst Vanessa Alvarez. It also shows that traditional telcos and providers will shift their focus and become cloud and IT providers in a blending of the "old school and new school."

"Terremark gets cloud, they understand the enterprise, making it a killer combination," Alvarez said. "Verizon needs this to remain competitive."

Next: More Cloud Consolidation To Come; Who's Next?

The drive for large providers to become cloud players is sure to spar more industry consolidation. Time Warner striking and snagging NaviSite just days after Verizon bought Terremark is a key indicator of that.

"This will certainly drive consolidation within the cloud and infrastructure services market," Cohen said. "For example I wouldn't be surprised if you see a few of the major hardware players branching out into the cloud service provider realm with some strategic acquisitions. The reason is simple, the desktop is dead. The main conduit for software has become the Internet. The line between software provider and infrastructure provider has quickly become blurred."

And there are some cloud providers that are ripe for the picking. Alvarez suggested that St. Louis-based Savvis should be dressing itself up for sale and could be a potential target for AT&T or another service provider or cable company. Other potential acquisition targets getting mentioned include GoGrid and Rackspace.

"I think consolidation will happen overall, particularly in the tier 2 and tier 3 regional service providers," she said. "It becomes much harder for them to compete and either become a broker for AWS [Amazon Web Services] or get acquired. Service providers and hosting providers with the right skills, like BlueLock, for example, look very appealing as acquisition targets."

For Verizon, the Terremark acquisition also bumps up its cloud profile, giving it an established infrastructure as a service player with a presence in Europe and Latin America and also giving it an edge into federal cloud accounts, which are expected to see immense growth in coming years.

"It certainly brings [Verizon] up a notch," Alvarez said. "Quite frankly, they were getting no traction. Terremark and Verizon share federal government customers, they were already partnering together for Verizon CaaS for SMB service, it made logical sense for them to buy before someone else did."

Cohen added that Verizon's $1.4 billion bid for Terremark was a small price to pay for a money-making, innovative company that has strong growth potential.

"They underpaid if anything. Also given the recent U.S. federal government cloud deals -- some are estimating in the billions -- this will prove to be a really smart move for Verizon," Cohen said.

He added: "Verizon has struggled as a cloud provider, this will certainly give them additional credibility and a team of very smart and knowledge cloud architects. The key here will be to allow Terremark to continue to operate as they always have without corrupting their corporate culture or stifling their innovation."

The question that remains is whether service providers like Verizon and Time Warner Cable can integrate cloud computing services and offerings into their traditional offerings. Appirio's Nichols said time will tell if they mix like "oil and water."

"Will we see more of it? Probably," he said. "What will remain to be seen is if it's possible to maintain a cloud business like this when it's so disruptive to the traditional model."