CenturyLink Considers Selling Its Data Centers: What Would That Mean To Partners?

CenturyLink might be taking a page out of Windstream's book as the telecommunications giant seeks alternatives for its data center operations and co-location business. Telecommunications provider WindStream agreed to sell its data center services business, including more than 20 data centers, to cloud services and co-location provider TierPoint last month for $575 million.

According to CenturyLink, there are several strategic alternatives on the table, including partnerships or a joint venture, a sale of all or a portion of the data centers, or potentially keeping the data center assets as part of CenturyLink's portfolio, said Glen Post, president and CEO of CenturyLink, during the provider's third-quarter 2015 earnings call this week.

"We believe we have the right strategy in combining our network service offerings with the delivery of managed IT and cloud-based services. … We expect co-location services will continue to be a service our customers will look to us for, but we do not necessarily believe we have to own the data center assets to be effective in delivery of those services," Post said.

[Related: CenturyLink Meets Q3 Earnings Expectations; Considers Selling Data Centers]

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Selling its data center business was the right move for Windstream and could make sense for CenturyLink, too, said Andrew Pryfogle, senior vice president of cloud transformation at Petaluma, Calif.-based master agent Intelisys. CenturyLink is a supplier partner to Intelisys.

The potential move has partners wondering if CenturyLink already has a potential suitor in mind for its data center business.

"I think they've been thinking about this for a while, and now that Windstream just sold [its data center business], it's probably the fuel they need to move forward," said John Hudson, director of service provider solutions at Lumenate, a Dallas-based IT consulting firm and CenturyLink partner.

Hudson believes this is indicative of more data center consolidation in the future.

"I think it’s a broader discussion about shrinking margins in the industry. I think [consolidation] is going to start to happen at a rapid pace," he said.

But while telecom companies might be moving out of the data center operations space, that doesn’t mean they are moving out of the cloud, Pryfogle said.

"The trend is a real one. A lot of service providers are being prompted to make the same decision right now, and some are choosing to focus on their core business," he said.

At the end of the day, CenturyLink is in the business of services, not the physical asset business, Lumenate’s Hudson agreed.

"I believe their value in the marketplace is derived from the outcomes they provide. It's just not about the physical locations or the co-location space," he said.

But Hudson is questioning whether MPLS circuits or private lines that were once "on-network," or directly connected to CenturyLink's own network within the provider's data centers, will still be considered on-network in a third-party data center, or if the connection will be going through another service provider to get to CenturyLink's network.

"I do wonder if now we are going to be [off-network] from a telco perspective and how that is going to impact the circuit lines," Hudson said. "Or, I wonder if CenturyLink will say its third-party facilities are considered [on-network], like Level 3 does with its data center partners," he said.

CenturyLink, Monroe, La., leases most of its 59 data center facilities in the U.S., Europe and Asia from third parties. CenturyLink's Post estimated that the provider most likely owns fewer than 10 data centers -- mainly former Qwest data center facilities.

CenturyLink's data center operations and co-location business generates annual revenue of approximately $600 million, according to the company.

"For us to really grow the business, the [co-location] business, it requires really more CapEx than we've been willing to put in," Post said on the earnings call. "[CenturyLink] said that up front, that we weren't going to invest heavily in the data centers."

Post elaborated on the company's data center operations review during the question-and-answer portion of the call, telling analysts that selling off its data center assets won't affect any of the cloud or hosting offerings the CenturyLink portfolio has today.

CenturyLink, like other service providers, doesn't have to "own the dirt" to provide cloud services, Intelisys' Pryfogle said.

"There are a lot of awesome data center companies out there running world-class [facilities], and CenturyLink already has relationships with many of them, so I don't think it changes their strategy at all. It just gets them away from having to run data centers."

Data center operations are expensive. If CenturyLink does sell some or all of its data center assets, the provider could be freed up to continue down the cloud acquisition path it's been on, Lumnate's Hudson said.

The sale also could free up operating cash that CenturyLink can put back into the business, Pryfogle said.

"They are definitely doubling down on their cloud strategy, so I wouldn’t be surprised if they were looking at other strategic acquisitions," he said. "They are becoming a significant player in the private and hybrid cloud arena, so I think investing more on that side of their business would be really smart."

"We think our cash flow maybe could be used for investments that can drive higher returns … and drive better shareholder value," Post said in response to an analyst question regarding profits from the potential sale.