Verizon buys Terremark

A couple of days ago, Verizon bid to acquire Terremark, for a total equity value of $1.4 billion. My colleague Ted Chamberlin and I are issuing a First Take on the event to Gartner clients; if you’re looking for advice and the official Gartner position, you’ll want to read that. This blog post is just some personal musings on the reasons for the acquisition.

Terremark has three significant businesses — carrier-neutral colocation (with the most notably carrier-dense facility being the NAP of the Americas in Miami, which is a major interexchange point), managed hosting, and VMware-based cloud IaaS (principally The Enterprise Cloud). As such, it overlaps entirely with Verizon’s own product lines, which are (non-carrier-neutral) colocation, managed hosting, and VMware-based cloud IaaS (Verizon CaaS). Both companies are vCloud Data Center partners of VMware, and both have vCloud Director-based offerings about to launch.

Verizon’s plan is to continue to run Terremark standalone, as a wholly-owned subsidiary, with the existing management team in place. Verizon might push its own related assets into the subsidiary, as well. Verizon will be keeping the carrier-dense facilities carrier-neutral.

The key question about this acquisition is probably, “Why?”

  • While Terremark’s cloud platforms are arguably better than Verizon’s, there’s not such a huge difference that this necessarily makes sense as a technology play.
  • In managed hosting, Terremark (or rather, Data Return, its managed hosting acquisition from a few years back) was the beneficiary of customers fleeing Verizon’s decline in Web hosting quality mid-decade, and it has certain cultural similarities to Digex (the Web hoster that Verizon bought to get into the business). It has superior automation but again, not so vastly better that you can point to the technology acquired as significant. It has better service and support, but not at the differentiating level of, say, Rackspace.
  • Terremark does have a bunch of data centers in places that Verizon does not, but Verizon hasn’t previously prioritized widespread international expansion. The two big flagship US data centers are nice facilities, but Verizon was already a tenant in the NAP of the Capital Region (reselling to federal customers), and thus able to derive value there without having to buy Terremark.

For Terremark, of course, the reasons are clearer. Mired in debt from data center construction, it has under-invested in the rest of its business of late (I believe VMware invested in Terremark because they needed money to accelerate their cloud plans). As a modest-sized company, it has also had limited sales reach. This represents a nice exit. Having a deep-pocketed sugar daddy of a carrier parent ought to be useful for it — provided that the carrier doesn’t wreck its business doing the things that carriers are wont to do.

Verizon’s sales force is probably the best thing that Terremark will get out of this. No carrier is as aggressive as Verizon at trying to sell cloud IaaS to its customers. It’s a way of changing the conversation — of getting a carrier sales rep in to see the CIO, rather than getting into the argument with the network guy (or worse still, the procurement guy) over penny-a-minute voice services. And while this is resulting in a lot of conversations with customers who aren’t ready to move their entire data centers into the cloud just yet, it’s planting the buzz in the ear — when these customers (particularly in the mid-market) get around to being ready to adopt seriously, Verizon will be on their mind as a potential vendor.

As an acceleration and market share play on Verizon’s part, this potentially makes more sense — Terremark likely has the highest market share in VMware-based self-managed IaaS. But it’s not Verizon’s way of getting into the cloud, despite the press spin on the acquisition — Verizon already has cloud IaaS and its offering, CaaS, is doing pretty decently in the market.

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Posted on February 1, 2011, in Industry and tagged , , . Bookmark the permalink. 3 Comments.

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