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Telecom Carriers Reassess What Is Core... Again

Simon Sherrington
Heavy Lifting Analyst Notes
Simon Sherrington
7/28/2016

Over the years, telecom operators have gone through several periods of market change; and each time the industry has evolved, carriers have been forced to reassess what is strategically important to them. This has resulted in waves of outsourcing as some carriers (but never all of them) have decided that they don't need to operate their own billing systems, or to run their IT, or their network operations centers (NOCs). In some cases, they don't need to run their own networks at all. Some have decided they can effectively compete by reselling third-party IT services; others have felt they need to be IT systems integrators with strong internal IT capabilities.

The latest wave of change to cause carriers to reassess what they are doing has been the shift to cloud computing. That shift has happened quickly. In a matter of four or five years, enterprises have migrated large numbers of their systems and applications into the cloud. Operators sought to take advantage of this trend by investing in data center facilities. They acquired data center operators, and they started building data centers themselves. Their ambition was to sell their enterprise customers the cloud applications and services they wanted to buy, the facilities to remotely host and support those cloud applications, as well as the networking services needed to run applications from remote locations. The idea was to sell a full stack of services to what would become a captive audience.

But competitors had other ideas. Amazon.com Inc. (Nasdaq: AMZN), Google (Nasdaq: GOOG) and Microsoft Corp. (Nasdaq: MSFT) started making massive investments in order to dominate cloud services. Rival data center operators started promoting cloud marketplaces based around key locations with the choice of access to many carrier networks. Major IT providers like HP Inc. (NYSE: HPQ) and IBM Corp. (NYSE: IBM) started promoting best-of-breed private cloud solutions combined with public cloud services using Amazon, Google and Microsoft. At the same time, network requirements began to change, and carriers realized they would begin to need data center locations in many more places -- often closer to customers -- and that their existing facilities were not always optimal. Meanwhile, customers started to buy best-of-breed solutions (in part wanting more flexibility) more often than vertically integrated offers.

All of this has led several carriers -- most notably recently AT&T Inc. (NYSE: T), Verizon Communications Inc. (NYSE: VZ) and CenturyLink Inc. (NYSE: CTL) -- to reconsider whether data center ownership, or the provision of data center services using internal expertise, really is a core part of their business. The idea of "outsourcing" data centers is very much front-of-mind, offering the potential to free up cash, increase the spread of services that carriers might offer and even to improve investor returns. But the idea of "data center outsourcing" covers a multitude of services and strategic options, and as before, outsourcing itself is not an option that appeals to all players in the market. Some are still investing heavily.

Heavy Reading's latest report, "Data center Outsourcing: Rise of the Reseller," examines the data center investment and service strategies of the world's biggest telecom operators. It reviews the trends shaping the data center industry and analyzes how the value chain is evolving. It also profiles a selection of leading carrier-independent data center operators and data center solution providers -- many of which have benefited from carriers' data center outsourcing decisions. The report considers what they have to offer to telecom operators considering reducing their activity in the data center and hosting businesses.

— Simon Sherrington, Contributing Analyst, Heavy Reading

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Infostack
Infostack
7/29/2016 | 7:30:55 AM
Carriers are at the edge
Semantics and perception are everything.  When the FCC started calling the internet cos at the "core" of the global internets in the early 2000s "edge providers" no one spoke up.  Maybe now we are beginning to understand they are the "core providers" and the MNOs/MSOs/telcos are merely edge access ISPs with limited view of and ability to serve final demand.  That puts them at a huge disadvantage when it comes to pricing ex ante.  As well, all their vertically integrated capex/opex results in obscene pricing when compared with true underlying economic cost per bit.  The "core providers" have an enormous advantage and its time for the trade and analysts to wake up to this new reality.  Let's start with semantics.
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