Software is eating the World or What Happened to my Phone Company?

The story of CenturyLink is a common story in the evolution of the Telco industry.  You can substitute Verizon or AT&T and it’s pretty much the same story.

In 2000, then CenturyTel acquired 300,000+ residential service lines from GTE. In 2010, CenturyLink acquired Qwest Communications. This new combined entity became the third largest telco in the United States with 17M access lines 5M broadband customers and 1.4M video subscribers. Traditional voice and data services.

Right around the same time in 2011, CenturyLink acquired Savvis. Savvis sold managed hosting and collocation services with more than 50 data centers (over 2 million square feet) in North America, Europe, and Asia, automated management and provisioning systems, and information technology consulting. At the time, Savvis had approximately 2,500 unique business and government customers.  Not so traditional Telco stuff as this was pure B2B.

But faster than you can say, “Gotta Keep up the Jones'” the corporate development groups at Verizon snatched up Terremark and Time Warner Cable purchased NaviSite. 

Both were Colo/Managed hosting providers like Savvis. What does a managed hosting and Colo business have to do with selling phone lines, video and broadband?  Not a whole lot.  These services are sold B2B and are the IT version of parking your car in the neighbors garage.  He may wash it and change the oil sometimes, but it’s still pretty much your car sitting in your neighbors garage.  He pays for the roof overhead, but that’s pretty much it.

A Short primer on Colo vs Managed Services vs. Cloud.

Collocation You purchase and own both the hardware (servers) and software that will host your web presence.  You are responsible for buying, setting up and configuring both. This is the easiest market with the lowest barriers to entry.  Read, Even the Telco’s could do it. 

Managed Hosting The hosting provider ‘managed’ everything that was required to give you an online presence for your website.  I’ll wash, wax and change the oil on your car regularly.

Shared hosting account – Multi-tenancy.  Which just means that many customers such as yourself shared space and resources on a single server, which has been designed to host multiple accounts simultaneously.  I’m renting you a zip car.

Dedicated hosting account, often referred to as a dedicated server.   These are your servers.  Kind of like Colo.  Customers concerned about security love this.

Public Cloud, Everything from Compute to Storage to database is virtualized and multi-tenant, spread across every region of the globe for disaster recovery with multiple zonal fail-over in each region to accommodate data sovereignty rules. I’m renting you a car that I can rent many times.  You never have to buy a car again.  Oh and I also make the car.  

More on that in a minute...

AWS Envy

You see five years ago CenturyLink and other Telco’s saw the rise of Amazon WebServices and believed they could compete head-on against AWS in the public cloud market. As noted above, that ambition inspired CenturyLink to buy Savvis for $2.5 billion in 2011. Around the same time, Verizon acquired Terremark and Time Warner Cable purchased NaviSite.

Why did this seem like such a good idea in 2011?  Back then, all these phone companies thought that they needed to compete with AWS was the physical presence of massive data centers.

But they grossly underestimated one key fact in AWS’s success.  Yes while they do own their own data centers for the most part, the reason why AWS is successful is because they are complete stack of truly virtualized, multi-tenant services based on commodity infrastructure and in the case of AWS, as opposed to Amazon.com, AWS writes the books. In other words, Just like GCP and Azure, AWS makes what they sell.  They are the manufacturer of: Aurora DB, Dynamo DB, Redshift, S3, Glacier and the swarms of other AWS products.  Their hardware COGS e.g. servers, storage and networking is on the cheapest commodity gear with smart software for fail-over and high availability.

The Telco’s are not software providers. And as Marc Andreessen so eloquently pointed out “Software is eating the World”.

Amazon’s AWS revenues continue to grow rapidly, surging 42 percent to $3.66 billion in the company’s Q1 2017.

Fast forward to present day to close on the current state of the Telco's. 

Verizon has essentially abandoned its public cloud and will instead focus heavily on private clouds as well as secure network connections to Azure and AWS just like Equinix.

From the Verizon CEO in August 2016.  “CenturyLink’s Colo revenue is not growing, and the telecommunications giant is looking for ways to avoid investing more capital in the segment. CenturyLink is looking for “alternatives” to owning its nearly 60 data centers around the world that support colocation, managed hosting, and cloud services”.

On Nov 04, 2016 CenturyLink sells Savvis to Private Equity for $2B.

Even the once mighty Rackspace (Never a Telco but an arch enemy of AWS) waved the white flag on March 8th 2017 when they announced a strategic relationship with Google Cloud to become its first managed services support partner for Google Cloud Platform (GCP). Google Cloud and Rackspace are collaborating on some new managed services offering for Google Cloud Platform customers that will launch later this year.

The managed support services will offer GCP customers added cloud architecture support, on-boarding, data migration expertise, as well as ongoing operational support for customers, to help ensure optimal cloud application performance. 

They’ve offered the same services for AWS for some time now.

That’s akin to Ford getting out of the car manufacturing and selling business and instead doing specialized services for Tesla. 

The cloud world has changed dramatically in the last 7 years.  Colo, Hosting, Managed Hosting business have all but dried up and most of these orgs are divested or reinvented themselves as services companies for the big three GCP, AWS and Azure.  You see, cloud computing takes enormous scale and tremendous software DNA up and down the stack. Without both assets, time to reinvent.