Refinance And Refocus: Verizon, CenturyLink and Windstream Enter 2016 With Leaner Strategies

Sophia Vargas

While mergers and acquisitions have proliferated in the colocation industry - each positioned to increase geographic coverage or higher order capabilities – in the last 6 months, a new trend has emerged: strategic divestitures, most prominently observed in the telecommunications space. Following the complete cycle, in 2010 and 2011, Centurylink, Verizon and Windstream made strategic acquisitions to increase their data center services portfolios, acquiring Savvis, Terremark and Hosting Solutions respectively. 5 years later, each firm has announced its intent to sell of some or all of these assets. 

So, what went wrong?

While telcos had arguably given birth to colocation, the fact remains that network and carrier providers have had troubling competing against pure play colocation and data center service providers like Equinix and Digital Realty. In the past, telecom providers described colocation and data center services as a way to enrich existing customer contracts. In an interesting twist, these new intended divestitures have been presented as a way to refinance core assets, focus on what drives their business, and move away from standardized services with high overhead and lower margins.  While vendors may keep their skeletons in the closet, I had some speculation as to what might be fueling these decisions:

-          Buyers want carrier density and diversity.  Even though all of these facilities support multiple connections into other carriers, customers tend to evaluate facilities by connectivity options instead of looking for carriers to provide data center capacity on top of network services. Additionally, many geographically dispersed companies are considering blended IP solutions to improve latency and performance across the globe.

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Watch Out For A Potential Glut Of “Dark Cloud” IaaS

Andrew Bartels

Back during the boom years, existing telcos and dozens of new network operators, especially in western Europe and North America, laid vast amounts of fiber optic networks in anticipation of rapidly rising Internet usage and traffic. When the expected volumes of Internet usage failed to materialize, they did not turn on or “light up” most (some estimate 80% and even 90% on many routes) of this fiber network capacity. This unused capacity was called “dark fiber,” and it has only been in recent years that this dark fiber has been put to use.

I am seeing early signs of something similar in the build-out of infrastructure-as-a-service (IaaS) cloud offerings. Of course, the data centers of servers, storage devices, and networks that IaaS vendors need can scale up in a more linear fashion (add another rack of blade servers as needed to support an new client) than the all-or-nothing build-out of fiber optic networks, so the magnitude of “dark cloud” will never reach the magnitude of “dark fiber.” Nonetheless, if current trends continue and accelerate, there is a real potential for IaaS wannabes creating a glut of “dark cloud” capacity that exceeds actual demand, with resulting downward pressure on prices and shakeouts of unsuccessful IaaS providers.

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