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November 11, 2019
Not since a British royal married the star of an American TV drama has a tie-up threatened such a cultural clash as this month's partnership between Telecom Italia and Google.
One is a 94-year-old Italian phone operator with creaking parts, warring shareholders and a surplus of ageing employees whose skills are no longer required. The other is an energetic 21-year-old Internet colossus that is reshaping the planet in its own image.
They have come together because of an untapped opportunity to provide cloud services in Italy. That market is growing fast -- at a rate of about 20% annually, according to Telecom Italia. But it remains small and fragmented, generating sales of around €2.3 billion ($2.5 billion) last year. With an 11% share, Telecom Italia is the biggest player and bags about €250 million ($275 million) annually. It is after a whole lot more, and it needs Google's help.
"We are glad to select Google as a partner for many reasons but definitely because we think they are the most innovative company in the world," said Luigi Gubitosi on a phone call with analysts last week. "Working with them will speed up cultural change and it will add a number of opportunities."
The first is simply to beef up Telecom Italia's portfolio with Google's rich set of cloud services. That will entail hosting Google Cloud, the web giant's platform, at Telecom Italia's facilities and selling it alongside Nuvola Italiana, Telecom Italia's existing cloud computing service. The idea is to provide a broader range of public, private and hybrid cloud services.
The next bit is even more interesting. Along with other service providers, Telecom Italia sees a major opportunity in "edge" computing, an evolution of the cloud that uses smaller IT facilities much closer to end customers than traditional data centers. With these "cloudlets," as they have been called by Germany's Deutsche Telekom, an operator can shrink the journey time for a signal on the network. That reduction, say edge enthusiasts, is needed for an array of more advanced applications, including services based on 5G technology and virtual reality.
Telecom Italia owns properties that could be turned into cloudlets, but it lacks digital knowhow. Google has that in spades but is missing the necessary physical infrastructure. An edge alliance holds obvious attractions for both companies as they try to address their shortcomings.
Details remain hazy. With 22 existing data centers, Telecom Italia says it will build Europe's first edge computing network using selected facilities. It has considered the possible extension of edge computing technology to several hundred of its central offices in future. During last week's call, Gubitosi shed some light on the initial plans. "Google Cloud will rely only on edge infrastructure that will be built in Rome, Milan and Turin," he said.
Google will also have responsibility for training about 800 Telecom Italia engineers to provide systems integration and professional services. While many of these are likely to be new recruits, others could be existing employees who are not caught up in the cull. Telecom Italia's workforce has lost 1,853 employees so far this year, giving it 56,048 at the end of September. Under restructuring plans, the operator plans another 1,000 cuts before the end of 2019 and 2,000 redundancies next year.
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Telecom Italia is targeting €1 billion ($1.1 billion) in overall cloud revenues by 2024 and €400 million ($440 million) in earnings (before interest, tax, depreciation and amortization). The terms of its agreement with Google are unclear, including the details of any revenue sharing, but these numbers will delight investors, implying a quadrupling in cloud revenues during the next five years. Overall company sales are under pressure and fell about 5% in the just-ended third quarter, compared with the year-earlier period. Gubitosi, moreover, thinks his targets are conservative. "€1 billion in sales is not that aggressive considering cloud growth," he said.
Anything that points to additional investment in capital expenditure makes investors nervous. Telecom Italia has prioritized debt reduction and did a good job on improving the appearance of its balance sheet in the recent third quarter. It does not want to start borrowing heavily to fund its cloud plans.
Telecom Italia's answer is to move all the cloud assets into a new company (imaginatively called NewCo, for the time being), and sell a minority stake to an infrastructure investor. "There is an enormous amount of infrastructure funds ready to be deployed and this is the investment they are looking for," said Gubitosi. "We are going to build data centers and get it financed by selling some of the equity. We can consider listing when it has matured."
Perhaps the biggest risk is that Telecom Italia and Google fail to bridge their cultural differences or fall out over the business. If that happens, it would not be the first time that alliances between technology companies from contrasting backgrounds have not delivered. In recent years, the tie-up between California's Cisco and Sweden's Ericsson is a stark example of a partnership that went nowhere. And there is plenty of reason to worry about Telecom Italia and Google. Service providers repeatedly grumble about Internet companies using their infrastructure and reaping all the rewards.
If all works out, Gubitosi hopes the partnership will spawn "an entire ecosystem" involving other important companies. That lofty ambition will require Telecom Italia and Google to get along royally.
— Iain Morris, International Editor, Light Reading
Read more about:Europe
International Editor, Light Reading
Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).
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