Cloud Data Centers: How WAN Providers Earn LAN Revenue

The cloud computing business in some cases is remaking the old distinction between “local area network” and “wide area network.”

Traditionally, the business models for LAN and WAN were as different as the physical scope of the networks.

Wide area network services were provided by entities that operate “outside the building.” Local area networks worked “inside the building.”

Businesses and consumers WAN “rent” services but “own” LAN infrastructure (Wi-Fi routers and in-building wiring and servers).

So the ownership modes always have been different. People and organizations own their own LAN infrastructure, and do not pay recurring service fees. Customers pay for WAN services, which are owned by others.

The capital-intensive WAN business requires large organizations with lots of capital to invest in building an operating huge networks. Its revenue model is “recurring access and transport services.”

The LAN ecosystem includes suppliers of consumer electronics appliances, system integrators in the small and mid-sized business segment and consultants and integrators in the enterprise segment.

The shift to cloud computing is in some cases causing WAN providers to blur the lines with the LAN space, at least in the data center “customer” segment. In other words, where LAN operations have not traditionally created revenue opportunities for WAN providers, ownership of data centers now drives traffic to the WAN, and also generates direct real estate revenue.

To be sure, it can be argued that the direct revenue is generated by “hosting” servers in a data center (a real estate transaction), not “moving bits” between customers in a data center. Some might argue ownership of a data center now creates a recurring revenue stream for moving bits within the building (something that formerly would have been a LAN function).

In that sense, at least where it concerns data centers, WAN providers who own data centers might be said to be earning revenue for data communications that might formerly been non-revenue LAN communications.

Global Cloud Xchange has put data centers at the heart of its strategy, even going so far as to change the name of the company from the former Reliance Globalcom.

Tata Communications has done something very similar, with a key nuance.

Like other service providers, such as Verizon, Tata has become an owner and operator of data centers and cloud infrastructure  In that instance, “transport” revenue is earned in a different way, in the form of adding transport to the “real estate” services and cloud infrastructure capabilities.

Global Cloud Xchange does not seem to be buying and operating data centers and colocation facilities that support “meet me” rooms.

Instead, Global Cloud Xchange seems to be architecting its transport network to provide transparency for server-to-server communications, so the long-distance connection acts like a cable connection between servers in the same building, on the same floor.

Tata, for its part, has created IZO Public, a cloud enablement service. Tata recently inked an interconnection agreement with Google, providing business customers a way to connect and build their public cloud services with consistently good user experience.

The IZO platform provides predictable routing and connections to data centers over the Tata Communications global network. In 2014, 24 percent of the world’s Internet routes travel over the Tata Communications network.

Cisco’s latest Global Cloud Index estimates that global data center traffic will grow nearly 300 percent between 2013 and 2018.

Although the amount of global traffic crossing the Internet and IP WAN networks is projected to reach 1.6 ZB per year by 2018,  the amount of annual global data center traffic in 2013 is already estimated to be 3.1 ZB, according to Cisco.

By 2018, “data center to end user traffic” will constitute 17 percent of total. About nine percent of traffic will move from data center to data center. About 75 percent of global data center traffic will stay within the building, moving from server to server.

That explains the high interest by capacity providers in data centers. In the past, most of the revenue made by wide area network providers was supplying capacity across the wide area network.

In the future, it is likely much revenue will be made supporting data communications between servers and entities within data centers, and some of that will fall to WAN providers that own data centers.