While mergers and acquisitions have proliferated in the colocation industry – each positioned to increase geographic coverage or higher order capabilities – in the last 6 months, a new trend has emerged: strategic divestitures, most prominently observed in the telecommunications space. Following the complete cycle, in 2010 and 2011, Centurylink, Verizon and Windstream made strategic acquisitions to increase their data center services portfolios, acquiring Savvis, Terremark and Hosting Solutions respectively. 5 years later, each firm has announced its intent to sell of some or all of these assets. 

So, what went wrong?

While telcos had arguably given birth to colocation, the fact remains that network and carrier providers have had troubling competing against pure play colocation and data center service providers like Equinix and Digital Realty. In the past, telecom providers described colocation and data center services as a way to enrich existing customer contracts. In an interesting twist, these new intended divestitures have been presented as a way to refinance core assets, focus on what drives their business, and move away from standardized services with high overhead and lower margins.  While vendors may keep their skeletons in the closet, I had some speculation as to what might be fueling these decisions:

–          Buyers want carrier density and diversity.  Even though all of these facilities support multiple connections into other carriers, customers tend to evaluate facilities by connectivity options instead of looking for carriers to provide data center capacity on top of network services. Additionally, many geographically dispersed companies are considering blended IP solutions to improve latency and performance across the globe.

–          It’s difficult to sell colocation as a differentiation when colocation is fairly standardized. Thanks to the standards created by the Uptime institute, ASHRAE and industry certifications like PCI, HIPPA and FISMA – colocation services are fairly consistent across providers, leaving vendors to differentiate on additional services and amenities.

–          Data center and carrier businesses do not behave the same. While together these services create the backbone for any technology service, they have distinct buying cycles and business models. Colocation purchase cycles tend to be longer due to the customization of each contract per customer requirement, not to mention tacking on additional services or multiple sites. From the customer’s perspective, these contacts tend to be negotiated separately, not to mention the fact that carrier services extend beyond the data center itself.

–          …nor do their finances. While carrier investments are targeted around reach and width and can be informed by prior customer usage trends and demand, data center assets involve large upfront, speculative investments within a market where purchasing and growth patterns are hard to predict. Additionally, colocation providers have the option to file as REITs – real estate investment trusts – which may lower taxes and provide more capital to push back into assets.

In a hybrid world, infrastructure sourcing will shift but the network will only grow

While capacity requirements are only increasing, companies continue to change their infrastructure distribution between owned, colocated, managed and cloud services – many possessing high aspiration for cloud applications and services. This trend complicates forecasts for traditional data center services, but the network will benefit most from this growth. This refinancing tango in the telco space suggests the carriers have acknowledged this trend and will attempt to stay ahead of the curve at the cost of other aspirations.

What does this mean for customers?

In a recent report, I discussed colocation provider reaction to the growth in hybrid cloud and infrastructure environments – many investing in platforms to connect tenants to partners or increasing the number of services offered to be able to supply a full portfolio of capabilities. While these recent announcements question the financial viability of the second approach – it does not speak to the customer’s perspective. As a result, I will be asking customers the following questions going forward:

–          Customers may want blended best of breed solutions, but are they ready to manage the complexity of multiple providers?

–          How can customers ensure consistent performance with increased heterogeneity in the supply chain? Who’s held accountable?

–          Does this put the power back in the hands of the service integrators to broker these contracts?

Please share your own thoughts with us!