Just because you’re big doesn’t mean that you can easily “own” an adjacent market.
Especially if your DNA screams “slow and manual — and formerly a monopoly”.
Article by Elra Hayward in Datacenter Dynamics.
Emphasis in red added by me.
Brian Wood, VP Marketing
Do telcos understand the data center business?
There’s something of a land grab going on at the moment. Both commercial data center businesses and network operators are expanding their facilities. They recognize that in our increasingly networked society the requirement for data center capacity will continue to grow, driven by factors such as the vast increases in data volumes as well as changing business processes and IT paradigms.
Many telcos have become very serious about developing their data center businesses. It now seems that just about every network operator is intent on buying or building out footprint. Some are more ahead in the game than others. In 2011, for example, CenturyLink bought Savvis and Verizon acquired Terremark. TeliaSonera has also expanded its data center facilities in recent years and T-Systems is currently building a vast 150,000 sq m data center – Germany’s largest – in Saxony, Anhalt, in response to “Germany’s high demand for cloud services”.
This is because many of these operators believe that cloud is where much potential revenue exists. Analyst firm Gartner forecasts that the cloud services market will be worth US$20.6bn in two years, with both Infrastructure-as-a-Service (IaaS) and cloud management and security services growing. In a recent note it pointed to a slight reduction in the rate of growth in IT outsourcing – specifically colocation, hosting and data center outsourcing – as organizations shift to a cloud services model.
Gartner managing VP Richard Gordon said: “We are seeing CIOs increasingly reconsidering data center build-out and instead planning faster-than-expected moves to cloud computing.”
Network providers such as Colt and Interoute will tell you that they no longer consider themselves to be telcos, and that the network is just one part of the information services platform they aim to provide. So how should commercial data center businesses look upon telco moves in the data center market? Are they a real and growing threat, or are they a natural and complementary fit?
Telcos have always had an interest in data centers, as Pravin Bolar, global head of solutions and infrastructure services at Indian IT services provider Tech Mahindra says.
“Telcos have always owned a lot of data center-type space which historically they needed to house their switching equipment,” Bolar says. “When the space needed for switching equipment shrunk, many went into the colocation business providing the power, racks, cooling and high-maintenance real estate. But increasingly they are looking to come out of this because the margins are low.”
Telcos, rather than be assigned to the role of providing a dumb pipe into a data center, want to move up the IT value chain, Bolar says. This means moving into enterprise hosting and managed services. But telcos by and large have always struggled to convince their potential customers they have the necessary skill sets to provide enterprise-type IT solutions.
To date (with some notable exceptions) telco attempts to move into enterprise hosting have met with limited success. “When you sell to an enterprise customer you need to offer a customized solution and this has always been a big challenge for telcos. The telco business model is based on a standardized set of offerings with rate plans, and in our experience telcos have struggled with the customization to provide an enterprise hosting solution,” Bolar says.
“Some have been successful through partnership with businesses like ours – where we provide all the applications and customization and they provide the infrastructure. We have had long relationships with both AT&T and BT, for example. But on their own, I think it’s very difficult for telcos to drive an enterprise hosting business. Telcos might have the real estate, the equipment and connectivity but they haven’t had the expertise.”
Posing a threat?
The advent of the Cloud has helped to create a business model telcos are comfortable with. A cloud service is utility based, it has a rate plan, it is pay-as-you-go – all are features of a business model that a network provider is used to and can relate to.
Network operators have the real estate and the connectivity, so surely this is where the threat to commercial data center operators lies? Bolar cites the example of a US semiconductor company which found it was unable to make a business case for moving its data center to the Cloud after speaking to commercial operators about its requirements. It found that once it had laid out its requirements to its network service provider, however, the business case became much easier to make.
Bolar says many companies will be looking for the same commercial arrangements: “Ten years ago enterprises were investing in building out data centers and now nobody is. Companies don’t want to put their capital dollars into building data centers, so commercial data center providers have to offer Infrastructure-as-a- Service to enterprises or they will struggle.”
But despite business models, the threat from telcos is limited, Caroline Chappell, senior analyst at Heavy Reading, says. “Everybody thinks that telcos should be able to do cloud and there are a handful of very advanced businesses which are successful – BT, Orange Business Services, AT&T, Verizon, Interoute are some examples – but Heavy Reading’s research shows that telcos are still not grasping the opportunity,” Chappell says.
There are aspects to the predicted growth in cloud services and expansion of data centers that will sit alongside it that will advantage a telco over a commercial data center provider. One of them is footprint in a country, another is the ability to offer a single end-to-end SLA for customers that buy network and cloud services.
Currently it’s a varied market; there are examples of coopetition with telcos running their cloud services from a third-party data center. If a telco is trying to provide an Amazon-type cloud where network and infrastructure are not joined up, then they will likely enjoy some success in their own backyard. There will always be enterprises in Italy that will trust Telecom Italia over Amazon, for example. But on a global level there is choice and we’ve seen bigger telcos investing in data centers around the world to stand a chance of being up with IBM, Microsoft and to be a business enterprises turn to.
Many telcos are not yet off the starting blocks, Chappell says. Instead, she says they are still just talking the talk or taking technology off the shelf from a big vendor and thinking that the market will come. “You would think that telcos have all the ingredients for making cloud work. The most advanced ones are joining up the Cloud with the network and providing secure private virtual cloud and hybrid cloud. Most though are just paying it lip service.” Chappell says those that are being successful are the ones that have realized that they needed either to make an investment in development work or have bought in expertise from outside.
Bolar adds that “telcos still need people who understand enterprise requirements, they need to do the right sort of marketing and put in the right sort of solutions expertise”.
Lots of telcos just don’t get it, Chappell says. “Who are telcos competing with?” she asks. “Amazon, IBM and so on. How many people manage the Amazon cloud and how many people work in a telco? Cloud should be a lean operation, with as much automation as possible. Again telcos by and large don’t understand lean processes and they don’t like automation. They don’t trust it.”
Chappell maintains this lack of trust even extends to a telco’s traditional bread and butter business – the network. This is because in order to make cloud work for enterprises the network has to be automated. “The network is the stumbling block. You can spin up a virtual machine in minutes but connecting it across a VPN outside the data center can take months. VPN provisioning times can be weeks and weeks. Even setting up virtual LANs within a data center is a manual process for most operators. Operators should be able to spin up a VM and spin it up with automatic connectivity at the same time – that’s the whole goal of software-defined networking (SDN). Even if there is SDN within the data center that also has to be mapped out to the wide area, to the customer. It’s going to matter to an enterprise how quickly it gets service, and how flexible its VMs can be,” Chappel says.
One network operator Chappell thinks has “got it” in regards to automation and SDN is Interoute. Its cloud business has gathered plaudits from the analyst community. It is a Gartner Magic Quadrant leader and was named 2014 IaaS Telecoms Provider of the Year by Frost & Sullivan. It has a converged network and compute platform – a virtual data center – and claims to be the owner/operator of Europe’s largest cloud services platform with nearly 200 data centers and colo facilities to America, Africa, Asia and network partners around the globe.
Interoute CTO Matt Finnie says the fastest growing part of Interoute’s business is now “data center computing type business”, accounting for a third of incremental revenues. He says many enterprises that traditionally have had some colocation and some data centers are now consolidating, as are online businesses that might have had scattered data centers.
“People have started to realize that if they want to make a data center investment it makes no sense for them to do it themselves. That penny is starting to drop. People are saying ‘skip the change in topology and the ideology, you can save me the hassle of buying a rack, powering it up, putting boxes in it and have someone walk around every now and then and check it’. For a lot of our customers it’s not a case of converting to a new religion, just buying simpler,” Finnie says.
“Look at what’s happened to networks. Only the very biggest build their own networks – Google, Facebook, Amazon, or a bank with huge IT department. I think the same is happening with computing. In the past everyone had a data center, now people are saying that it doesn’t make a whole heap of sense.”
Finnie says he believes that as cloud services become commonplace, both commercial data center operators and telcos will need to examine their business models. “A virtual data center is part of the network. Our virtual data center is a couple of racks which we insert next to our core routers. We add on average 700 machines at a go every time we drop one of these pods (performance optimized data centers) in – and we’ve been doing this about two years now,” Finnie says.
“The problem for the real estate guys is that they don’t have a network. They’ve previously made a virtue out of the fact that an enterprise has a choice of network provider – that’s great if you’re building from scratch but if you’re buying it as a service it’s not so important. We’ve automated everything, the first thing a customer does is choose the network, public or private, and we don’t charge for it.”
Of course there are still hurdles to overcome. Business wants to know where the data is, who has access to it, whether it is secure and so on. Finnie says that Microsoft and Amazon have been doing cloud providers like Interoute a big favour with their marketing to reassure enterprises on issues like these. “We’re finding it’s less about size and more about skills within the corporation,” he adds, echoing Bolar’s comments.
“Businesses come to us asking how they replicate what they’ve got and then they realize that they don’t need to do it in the same way that they used to. Other telcos haven’t embraced automation in a big way – we’ve already done it.”