U.S. Telcos Exiting Data Center Business?

Several developments confirm a shift of strategy by large U.S. telcos and the apparently-secure role of specialists in the data center business.

Digital Realty Trust, the second-largest data center REIT after Equinix, is adding more capacity, bringing online a two-million-square-foot property in Ashburn, Va.

At the same time, the large U.S. telcos either have concluded that data center ownership no longer is a “core” asset, and have sold, are trying to sell, or might sell, their data center portfolios.

It is a truism that communications service providers are in a race to replace declining legacy revenues with earnings based on next generation services that largely center, one way or the other, on Internet apps, services and devices.

Along the way, some approaches that seemed appealing in the past are being revised. For the most part, few large telcos, cable TV or other service providers have had much luck creating big new businesses in consumer over the top services, even if that effort continues.

Most large U.S. service providers, for example, also seem to be concluding that data center operations are not “core assets.” They understand that data center services must be bundled with other enterprise and business customer offers.

But they also seem to be concluding that capital is better deployed elsewhere, and that data center services can be supplied on a “lease rather than own” basis.

Verizon might be the first large U.S. service provider to conclude that its extensive global network assets might also be “not core assets.”

Verizon Communications now is said to be exploring a sale of its “global enterprise assets” built on the former MCI-Worldcom global network plus the data center business (Terremark).

Verizon Chief Financial Officer Fran Shammo said, during the company's third-quarter earnings call on Oct. 20, 2015, that it continues "to work through secular and economic challenges" with its global enterprise division, which posted a 4.9 percent decline in revenue in the quarter ended Sept. 30, 2015.

In many ways, that trend speaks to changes in the ways enterprises globally have changed “what” they buy in the connectivity arena, as well as “from whom.”

There is declining demand for legacy connectivity of every sort, and growing demand for IP connections and bandwidth. Need for data center support also is changing as cloud computing becomes mainstream and public computing resources from Amazon Web Services and others become viable options.

Verizon spent $8.4 billion to acquire MCI-Worldcom in 2006. Verizon bought Terremark Worldwide in 2011 for $1.4 billion. Altogether, that represented $9.8 billion in acquisition costs.

Some think the assets could be sold for $10 billion. Some estimate the assets produce about $2 billion in annual revenue, implying a sale price about five times annual revenue.

Of course, Verizon has a revenue profile distinct from other large U.S. service providers, as 85 percent of its total revenue is earned from its U.S. mobile segment. All consumer operations and fixed network enterprise together represent just 15 percent of revenue.

Still, the trend to divest data center assets, mostly acquired over the past decade, suggests a belief on the part of large service providers that sustainable advantage cannot be gained by owning such assets.

If so, we might also conclude that large U.S. telcos no longer see the data center business as a path to future growth, in the same way that most large telcos have had scant success creating large new businesses in the consumer over-the-top domain.

In addition to the possible sale of Verizon data center assets, AT&T and CenturyLink likewise are trying to sell their data center businesses.

Windstream already has divested its data center business.  

So what is going on? There appears to be nothing fundamentally “broken” with the data center businesses. But most larger U.S. telcos seem to believe they can obtain the benefits (services for their enterprise customers) without owning the facilities.

CenturyLink appeared to believe colocation center hosting would provide a boost several years ago when it bought Savvis.

While it plans to continue offering colocation services, CenturyLink says it is looking for alternatives to owning nearly 60 data centers around the world that support colocation, managed hosting, and cloud services.

Cincinnati Bell also is monetizing its data center assets, selling ownership shares of its CyrusOne data center business and raising cash to reduce debt.

CenturyLink business segment revenues might be “driven principally by increased market penetration of our network, hosting, cloud, and IT solution service offerings,” as CEO Glen Post said.

But capital might be better deployed elsewhere, CenturyLink suggests. “We expect colocation services will continue to be a service our customers will look for us for, but we do not necessarily believe we have to own the data center assets to be effective in delivery of those services,” said Post.

CenturyLink’s revenue for the cloud and hosting  business is about $600 million annually, and the company says it seeks to sell or otherwise restructure the data center operations, not the cloud and hosting businesses that use data center real estate.

Experimentation is to be expected. Large service providers must expect to replace half their existing revenue sources about every decade, and the diminution of all the legacy core services implies a future revenue base build nearly completely on “new” services.

Finding big new revenue sources will be complicated by changing value and roles within what we used to call the “communications” ecosystem. Simply, value and revenue growth are migrating to cloud apps and software products, and away from managed communication services.

One is reminded of moves many large telcos made, in past decades, in the “computing” industry, again without long-term success.

That is just part of the continuing evolution of the business. Many efforts will prove disappointing. And it appears we now can add “owning data centers” to the avenues that have proven disappointing. No matter. The search will continue.

iPass Customers Can Use Fon Hotspots

Hotspot suppliers iPass and Fon Technology, the two largest Wi-Fi networks in the world, have formed a partnership to allow iPass customers to use nine million Fon hotspots.

The agreement will provide iPass with additional Wi-Fi capacity to offer its enterprise customer base.

The companies also say they are in further discussions to provide members of the Fon community with access to iPass hotspot network at airports, hotels and other public areas.

In combination with other recent network partnerships, iPass enterprise users will have access to 50 million Wi-Fi hotspots worldwide by the end of 2015.

Cisco and Ericsson Create Global Partnership

Cisco and Ericsson have announced a global business and technology partnership across routing, data center, networking, cloud, mobility, management and control, and global services capabilities to support Internet of Things and mobile enterprise capabilities.

The firms will create reference architectures and joint development, systems-based management and control, a broad reseller agreement, and collaboration in key emerging market segments.

The parties have also agreed to discuss patent licensing policies and enter a licensing agreement for their respective patent portfolios, enabling unfettered joint innovation and providing certainty for customers of both organizations.

The agreement already calls for Ericsson to receive license fees from Cisco.

The combination will face all the typical execution challenges of big collaboration agreements, but some might argue the effort is, in large part, a response to the Nokia purchase of Alcatel-Lucent, against the background of vigorous competition from China-based technology suppliers.

The partnership is expected to drive incremental revenue in calendar year 2016 and $1 billion or more in annual revenue for each firm by 2018.

"Ad Blocking" Threat Appears in Facebook 10-Q

For the first nine months of 2015 and 2014, advertising accounted for 95 percent and 92 percent , respectively, of Facebook’s revenue, which is why ad blocking could eventually be an issue.

“Technologies have been developed, and will likely continue to be developed, that can block the display of our ads, particularly advertising displayed on personal computers,” Facebook says in a Securities and Exchange Commission filing.

Up to this point, Facebook says, “revenue generated from the display of ads on personal computers has been impacted by these technologies from time to time.”

“If such technologies continue to proliferate, in particular with respect to mobile platforms, our future financial results may be harmed,” Facebook notes. Of course, such statements, made in the “business risks” section of quarterly 10-Q filing are not unusual.

Those sections typically outline all the possible ways management believes the business could be negatively affected. Still, the specific mention of ad blocking is significant.

Any business reliant on advertising would be harmed by widespread consumer ability to block the majority of such ads.

Data Center Operators Expect SDN Cost Savings Within 24 Months of Adoption

A study of data center operator views of their software defined network investments shows most expect operating cost savings related to their data center networks within the first 24 months.

Opex savings and capex savings are among the reasons data centers are adopted SDN in the first place.

Verizon Wants to Sell Long Haul, Data Center Assets

Verizon Communications now is exploring a sale of its “global enterprise assets” built on the former MCI-Worldcom global network plus the data center business (Terremark).

Verizon Chief Financial Officer Fran Shammo said, during the company's third-quarter earnings call on Oct. 20, that it continues "to work through secular and economic challenges" with its global enterprise division, which posted a 4.9 percent decline in revenue in the quarter ended Sept. 30, 2015.

In many ways, that trend speaks to changes in the ways enterprises globally have changed “what” they buy in the connectivity arena, as well as “from whom.”

There is declining demand for legacy connectivity of every sort, and growing demand for IP connections and bandwidth. Need for data center support also is changing as cloud computing becomes mainstream and public computing resources from Amazon Web Services and others become viable options.

Verizon spent $8.4 billion to acquire MCI-Worldcom in 2006. Verizon bought Terremark Worldwide in 2011 for $1.4 billion. Altogether, that represented $9.8 billion in acquisition costs.

Some think the assets could be sold for $10 billion. Some estimate the assets produce about $2 billion in annual revenue, implying a sale price about five times annual revenue.

AT&T and CenturyLink also are trying to sell their data center businesses. One might therefore conclude that U.S. tier one service providers no longer believe ownership of data center assets provides as much business advantage as once believed.

Disruption of the legacy communications business continues.

Cable One Deploying Gigabit to 1.5 Million Homes in 2016

Cable One, a cable TV operator serving more than 200 cities and towns mostly in the western parts of the country, will launch gigabit Internet access services in 2016 to the “majority” of its customers, representing about 1.5 million locations.

The company will begin launching residential gigabit service in the first quarter of 2016 in Altus, Okla.; Duncan, Okla.; Borger, Texas; Emporia, Kan.; Bisbee, Ariz; Cottonwood, Ariz.; and McCall, Idaho.

CenturyLink Generates 58% of Revenue from Business Segment

In its third quarter of 2015, 58 percent of CenturyLink revenue was generated in business segments of its business, about 33 percent from consumer revenues.

Business contributed $2.6 billion of revenue, while the consumer segment contributed 33 percent.

That, in a nutshell, illustrates one problem tier one and tier two telcos face.

Even if one argues investment in the consumer portions of the network are necessary to support business customer operations, financial returns from the consumer segment are under pressure, compared to the business segments.

In other words, 58 percent of total revenue is generated by a relative fraction of the network.

That is the growing problem for fixed network providers in general.

Will Video Drive Fixed Network Adoption Towards 95% Levels?

Some might yet wonder what it will take to get adoption of high speed Internet access in the U.S. and other markets up to 90 percent or higher. The traditional answer has been “TV.” Eventually, consumers will shift to over the top TV and away from linear, making a high-capacity home Internet connection essential.

In other words, “use of computers” will not be the activity that drives the incremental adoption.

And substitution of smartphones for PCs or laptops might not change matters.

In fact, mobile phone ownership might now be cannibalizing some need to own a PC. Some 92 percent of U.S. residents own a mobile phone, 68 percent a smartphone and 73 percent a desktop PC or notebook PC.

The effect on demand for home Internet connections is clear. If perhaps seven to 10 percent of consumers say they rely exclusively on mobile for Internet access, then mobile access is a substitute for fixed network Internet access.

But it still is the case that video will drive incremental adoption of fixed network Internet access. The reason is that as entertainment video shifts to over the top delivery, a fixed network Internet access connection becomes a prerequisite.

At the same time, the fixed network allows offload of mobile data consumption to Wi-Fi.

The point is that video--one way or the other--will underpin incremental fixed network Internet access demand, even if primary demand is driven by Internet access itself.

At the same time, increasing ability to seamlessly switch access between mobile and fixed networks will complicate the matter.

Internet access already includes a mix of fixed and mobile access modes, but changes in video delivery might complicate usage patterns and therefore our sense of the extent of Internet access adoption and use.

In 2013, fixed network Internet access was purchased by about 74 percent of U.S. households.

In 2015, use of the Internet was higher than 86 percent, but that is not identical with the number of homes buying Internet access. If 92.5 million U.S. homes bought fixed Internet access, and if one assumes there are roughly 120 million occupied homes,  fixed Internet adoption might be 77 percent.

Some might argue that adoption already is at about the 90 percent level, but that an increasing percentage of consumers use mobile Internet access, and may not buy fixed access products.

About 10 percent of consumers say they rely exclusively on smartphones for Internet access.

The point is that use of television, not use of computers, might eventually drive fixed network Internet access adoption towards levels we used to expect of voice services, and more recently cable TV services (85 percent to 95 percent adoption).

The other possibility is that fixed access adoption never actually reaches those levels, since mobile-only is proving to be a viable form of Internet access for an arguably-growing number of consumers.

Whether that remains the case when a major shift to over the top video, and away from linear video, is the question.

Given the higher cost per bit of mobile Internet access, compared to fixed access, it would be difficult for mobile operators to supply, or consumers to afford, enough capacity to support a full shift of most TV consumption to mobile networks and devices.

At present retail tariffs and linear video consumption patterns, a full shift to consumption of TV on an on-demand, mobile basis would not be possible, one might argue.  

The networks could not handle the load, nor would consumers be willing to pay.

But it is hard to say how supply will change in the future. If one assumes a robust and seamless ability to offload heavy video consumption to Wi-Fi, a larger percentage of consumers might well conclude they can live without a fixed Internet connection, if they are willing to work around it.

The big issue is that the greatest volume of video consumption happens at home, the location where a fixed access service is essential for Wi-Fi access.

And that suggests incremental demand for fixed Internet access will grow, despite mobile consumption.  

Windstream Offers 100 Mbps to 1 Million Consumers

Windstream now offers consumers and small businesses in 600 markets across 12 states faster Internet speeds of up to 100 Mbps.

Altogether, nearly one million households and small businesses now have access to premium speeds up to 100 Mbps in Windstream communities.

Those moves are in large part enabled by the sale of Windstream’s data center business.

In the third quarter of 2015, Windstream earned nearly 62 percent of total revenue from business customers, however.

Total revenue was $1.5 billion in the third quarter, up $80 million sequentially due to organic growth of $7 million and incremental “Connect America Fund” (universal service) revenue of $73 million.  

Consumer service revenue was up on a sequential basis with continued growth in high-speed Internet bundled revenue, Windstream said.

ILEC small business revenues were $107 million in the third quarter; carrier service revenues were $169 million; enterprise service revenues were $501 million and out of region small business service revenues were $146 million.

Telco Data Center Strategies Diverge

One example of the growing variety of business strategies embraced by tier-one telcos is the matter of data center “colocation” assets. 

One argument, and one strategy, is that ownership of such facilities creates an access and transport opportunity for the carriers, irrespective of direct revenues earned by supplying real estate and services.

The other argument is that transport and access revenue can be earned without the necessity of owning data centers.

And growing pressure on operating margins can tip the balance, even if data center ownership is generally thought to be a positive. That appears to the case for Cincinnati Bell, which is selling ownership shares of its CyrusOne data center business, raising cash to reduce debt.

CenturyLink appears to be thinking along the same lines regarding its own colocation business. CenturyLink appeared to believe colocation center hosting would provide a boost several years ago when it bought Savvis.

While it plans to continue offering colocation services, CenturyLink says it is looking for alternatives to owning nearly 60 data centers around the world that support colocation, managed hosting, and cloud services.

As in the case of Cincinnati Bell, CenturyLink might now be more concerned about debt reduction than revenue upside from owning the data center business.

CenturyLink business segment revenues might be “driven principally by increased market penetration of our network, hosting, cloud, and IT solution service offerings,” as CEO Glen Post said.

But capital might be better deployed elsewhere, CenturyLink suggests. “We expect colocation services will continue to be a service our customers will look for us for, but we do not necessarily believe we have to own the data center assets to be effective in delivery of those services,” said Post.

CenturyLink’s revenue for the cloud and hosting  business is about $600 million annually, and the company says it seeks to sell or otherwise restructure the data center operations, not the cloud and hosting businesses that use data center real estate.

In fact, most of CenturyLink’s cloud and hosting operations are run out of leased data center space, at the moment.

And CenturyLink executives are not willing to commit the new capital they estimate is required to grow the business. They also believe cash generated by an asset sale would earn a higher return in other lines of business.

Windstream is selling its data center business as well. As often is the case, it appears specialists are better positioned in the data center and colocation business than some telcos might be.

On the other hand, other telcos seem to believe they must take a bigger position in data center business. Reliance Communications is among those firms increasing investment in the data center business.

Orange Spain Fiber to Home Network to Cover 14 Million Homes by 2020

Orange’s fiber access network  in Spain reaches 5.2 million households and will reach 10 million in 2016 and 14 million by the end of 2020, the company says.

Orange’s fiber-to-home network will by 2020 cover more than 80 percent of all Spanish cities with more than 20,000 inhabitants, allowing Orange to claim the title of “Europe’s leading alternative operator” providing fiber to premises coverage.

Orange also says it will invest is 1.5 billion euro in its Spain 4G network, reaching 95 percent of the Spanish population in 2017.

Orange aims to reach four million additional fiber-to-home households by the end of 2020, on top of the 10 million households that the company has already announced for the end of 2016.

Colorado Towns and Counties Win Right to Build Their Own Broadband Networks

It is too early to know what might come next, but voters in at least seven Colorado communities--and some say as many as 43 cities or counties--on Nov. 3, 2015 opted out of state rules preventing municipalities from creating their own telecommunications networks.

That might lead some to consider building Wi-Fi access facilities, optical backbones or even considering other more direct challenges to telco and cable TV high speed access.

At the very least, the new freedoms will provide continual pressure on CenturyLink, Comcast and other firms to continue significant bandwidth investments.

Comcast, for example, already has committed to upgrade all its networks to 1 Gbps speeds in 2016, with 2-Gbps access available in perhaps 85 percent of locations.

CenturyLink already is rolling out gigabit service in a number of neighborhoods in its metro Colorado locations.

But the local governments now have the right to build and operate their own facilities, if they choose to do so.  

Useful Wisdom from "Dr. Seuss"

In the Dr. Seuss book Horton Hears a Who, Horton the elephant, splashing in a pool, hears a small speck of dust talking to him. The speck is a tiny planet, home to a community called Whoville. "A person's a person, no matter how small," the mayor of Whovillle says. Yes, indeed!

Will VoLTE Revenue Be Net "Zero"?

What are the revenue implications for service providers if two billion VoLTE (Voice over LTE) connections are in service by 2020? One possible explanation is that VoLTE will represent $100 billion in annual service revenue.

But that is hard to parse, since VoLTE in one genuine sense only represents the ability to sell mobile voice service over a fourth generation network, with native support by the 4G network. For the most part, VoLTE therefore only represents voice revenue that already had been provided using 2G or 3G platforms.

In other words, net revenue might not be much more than "zero."

“Direct revenues from VoLTE will be limited at first,” argue analysts at Juniper Research. Mobile operators initially will focus on experience and quality of service, rather than monetization.

You might say the same is true for Wi-Fi calling (VoWi-Fi). “Operators are launching the service to add value for the customers with little investment, where VoLTE is focused on operator network efficiency,” Juniper Research said.

Whether high definition voice provides a better revenue opportunity might also be questionable. The problem is that HD voice might wind up being mostly a way to compete with over the top voice apps.

If so, then is is unlikely a premium of any sort can be charged for the HD quality.

Facebook Messenger, for example, recently launched free high definition VoIP calling over mobile and Wi-Fi networks. It is tough to compete with “free,” so carrier HD voice is unlikely to represent a chance to hike prices.

In most cases, VoLTE, VoWi-Fi and HD voice are likely to be features, rather than revenue drivers.