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Is Rackspace the Best Next Move for CenturyLink?

Ray Le Maistre
9/9/2014

It's hard to find anyone these days who hasn't bought into the idea that cloud services will -- and already do, in many Tier 1 cases -- play a critical role in telco service strategies.

So speculation that CenturyLink Inc. (NYSE: CTL) has been chatting with Rackspace about a potential acquisition, as reported Monday by Bloomberg, is not shocking news -- more a sign of the times.

For a telco to acquire mature and trusted cloud services assets makes sense, in general. But does CenturyLink buying RackSpace, which now commands a market valuation of $5.7 billion following Monday's 6.85% share price hike to $39.79, make sense?

For Rackspace it does, reckons my colleague Carol Wilson, who follows the US telco cloud services sector closely. She has noted previously that industry analysts say Rackspace, which specializes in cloud computing and hosting services, is thought to be falling behind the other big cloud players such as Amazon Web Services Inc. , IBM Corp. (NYSE: IBM), Microsoft Corp. (Nasdaq: MSFT) and Google (Nasdaq: GOOG), "especially when it comes to delivering applications-as-a-service, which is the next cloud wave." (See Are Telcos Still Playing Cloud Catch-Up?)


Need to know more about network functions virtualization and the cloud? Then check out the agenda for NFV and the Data Center, September 16 at the Santa Clara Marriott, Calif.


So hooking up with a major telco makes sense for Rackspace, which "has a reputation for excellent customer service and support, but wasn't keeping up with the big boys," says Wilson.

How about CenturyLink? It has already made a number of M&A commitments to the cloud services market, most notably acquiring Savvis in 2011 and Tier 3 in 2013. (See CenturyLink Buys Cloud Leader Tier 3, CenturyLink Shows Cloud Is Still Critical, CenturyLink's Rise to Tier 1 and CenturyLink Clouds Up With Savvis Buy.)

As Carol has previously noted, CenturyLink Cloud Solutions is already a player, combining the Tier 3 enterprise cloud with the Savvis strength in managed IT services into a new strategic offer. (See CenturyLink Cuts Cloud Prices, Touts Power.)

"Adding a respected public cloud service like Rackspace would give CenturyLink another major element in terms of commodity cloud on which to build," she notes.

But as has been pointed out by Caroline Chappell, Principal Analyst, Cloud and NFV, at Heavy Reading , the next wave of cloud services is in apps and services, not raw compute power. So, if CenturyLink acquired Rackspace, it would then have to integrate yet another acquisition while at the same time "trying to push forward with its strategy of helping enterprises manage the complex process of moving apps to the cloud," notes Carol.

So should such a deal actually come to pass, it might solidify CenturyLink's position in the cloud services market, but it might not move it on too far.

— Ray Le Maistre, Circle me on Google+Follow me on TwitterVisit my LinkedIn profile, Editor-in-Chief, Light Reading

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CChappell
CChappell
9/10/2014 | 1:19:46 PM
Re: Next cloud thing?
The big telcos see Google and Amazon as competitors - they're usually present in enterprise RFQs - along with the likes of IBM and HP. Microsoft is trickier because it's co-optition - Microsoft has never allowed its apps to leave Azure, so telcos have to effectively 'resell' Microsoft cloud as part of their cloud offers to enterprises.  Telcos say they win against Amazon and Google when enterprises want mission critical business applications like ERP delivered across multiple geographies. Telcos can leverage their MPLS network capabilities and service wrap to provide price and customer support benefits. 
cnwedit
cnwedit
9/10/2014 | 12:19:10 PM
Re: Next cloud thing?
Mitch,

Caroline's comments are right-on. She's talking  about more specific enterprise apps, in additional to the ones you cite. 

And it's something I hear every day from telecom cloud providers. Their enterprise customers want them to deliver the business apps - CRM, ERP, etc. - from the cloud, not just a plain infrastructure or compute service. 

Hybrid clouds are part of that bigger picture as well, to be sure, so that enterprises can pick and choose which of their IT apps are on premises, which are in private clouds and which are in public clouds, depending on a variety of factors. But apps are definitely where it's at right now. 

 
Mitch Wagner
Mitch Wagner
9/10/2014 | 12:16:42 PM
Re: Apps and services
Carolin - Ah. Makes sense.

One thing I've been wondering about is whether the big cloud companies -- Google, Facebook, and Microsoft in particular -- are going to emerge as competitors to carriers. And tough competitors at that. Microsoft in particular has enterprise expertise as well as cloud skills. 
CChappell
CChappell
9/10/2014 | 11:44:11 AM
Apps and services
of course the two aren't incompatible, Mitch. One of the services telcos have been scrambling to provide over the past year or so is the provision of fast, dedicated pipes to third party app clouds, so that enterprise customers can access Office365 or SAP, for example, in addition to the telco's own IaaS services - a hybrid cloud use case. But what was meant was TELCOS providing SaaS delivery and PaaS - there is money to be made from the value-added hosting of an ERP service worldwide for an MNC over and above 'commodity' IaaS. This requires a sophisticated service wrap which the largest telco cloud providers are well-placed to provide. Hybrid cloud may indeed be part of such an enterprise deal. Then there are cloud providers like Telefonica revisiting the SME market opportunity for SaaS, although no longer on a 'turn up at our online portal' basis, but with more services and support (and more value for Telefonica).
Mitch Wagner
Mitch Wagner
9/9/2014 | 8:41:41 PM
Next cloud thing?
I wonder what Caroline is thinking about the next big thing in cloud being apps. 

Apps are already a thing: Salesforce, Google Apps, Microsoft 365. 

The next big thing for cloud is hybrid cloud -- giving enterprises the tools to host what they want locally and surge to the cloud when they need to. Companies like CenturyLink and Verizon Terremark are leading there. 
Atlantis-dude
Atlantis-dude
9/9/2014 | 1:02:36 PM
Re: M&A magnet?
HP, VMW, Megapath
Ray@LR
[email protected]
9/9/2014 | 11:38:52 AM
Re: M&A magnet?
Yes, that's a lot of experience and know-how in rackspace that's hard to puit a value on... and the telcos need all the insight into the IT servcies world they can get, even if tghey have made acquisitions before.

Maybe this will attract some additional action. And a great point about the MSOs.

The worst thing that could happen for Rackspace I guess is that no one shows any interest...

 

re T-Mobile -- that's an interesting idea.... If that happens you should get a finder's fee...
brooks7
brooks7
9/9/2014 | 10:31:09 AM
Re: M&A magnet?
Ray,

I think Rackspace would be a great fit for any of the major CSP (Comm Service Providers) that want a bigger cloud footprint.  The Cable Guys in particular would really up their game in Business Services.  But....

I am just always surprised that T-Mobile is not on CenturyLink's radar.  

 

seven

 
Ray@LR
[email protected]
9/9/2014 | 10:16:12 AM
M&A magnet?
MIght this draw other potential suitors into the frame?

WHo else might want Rackspace as part of its portfolio?
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