Can telcos tap into the datacentre business?

Telcos have always run datacentres, but now many are hoping to give commercial providers a run for their money

There is something of a land grab going on at the moment. Commercial datacentre businesses and network operators are both expanding their facilities. They recognise that in our increasingly networked society, the requirement for datacentre capacity will continue to grow, driven by factors such as the vast increases in data volumes as well as changing business processes and IT paradigms.

Many telcos have become very serious about developing their datacentre businesses. It seems just about every network operator is intent on buying or building out footprint. Some are further ahead than others. In 2011, for example, CenturyLink bought Savvis and Verizon acquired Terremark. TeliaSonera has also expanded its datacentre facilities in recent years and T-Systems is currently building a vast 150,000m² datacentre – Germany’s largest – in Saxony, Anhalt, in response to “Germany’s high demand for cloud services”.

Many operators believe there are rich pickings to be had from the cloud. Analyst firm Gartner forecasts the cloud services market will be worth $20.6bn in two years, with both infrastructure as a service (IaaS) and cloud management and security services growing. In a recent note, it pointed to a slight reduction in the rate of growth in IT outsourcing – specifically co-location, hosting and datacentre outsourcing – as organisations shift to a cloud services model.

Gartner managing vice-president Richard Gordon says: “We are seeing CIOs increasingly reconsidering datacentre build-out and instead planning faster-than-expected moves to cloud computing.”

Network providers such as Colt and Interoute will tell you they no longer consider themselves to be telcos, and that the network is just one part of the information services platform they aim to provide. So how should commercial datacentre businesses look upon telco moves in the datacentre market? Are they a growing threat, or a complementary fit?

Beyond the dumb pipe

Telcos have always had an interest in datacentres. Pravin Bolar, global head of solutions and infrastructure services at Indian IT services provider Tech Mahindra, says: “Telcos have always owned a lot of datacentre-type space which, historically, they needed to house their switching equipment. When the space needed for switching equipment shrunk, many went into the co-location business, providing power, racks, cooling and high-maintenance real estate. But, increasingly, they are looking to come out of this because margins are low.”

Telcos want to move up the IT value chain by moving into enterprise hosting and managed services

Telcos, rather than be assigned to the role of providing a dumb pipe into a datacentre, want to move up the IT value chain, Bolar says. This means moving into enterprise hosting and managed services. But, by and large, they have always struggled to convince customers they have the necessary skillsets to provide enterprise-grade IT solutions.

To date (with some notable exceptions), telco attempts to move into enterprise hosting have met with limited success. “When you sell to an enterprise customer, you need to offer a customised solution and this has always been a big challenge for telcos,” says Bolar. “The telco business model is based on a standardised set of offerings with rate plans, and in our experience they have struggled with the customisation required to provide an enterprise hosting solution.

“Some have been successful through partnerships with businesses like ours – where we provide all the applications and customisation and they provide the infrastructure. We have had long relationships with both AT&T and BT, for example. But on their own, I think it’s very difficult for telcos to drive an enterprise hosting business. They might have the real estate, the equipment and connectivity, but they don’t have the expertise.”

Limited threat to existing providers

The cloud has helped to create a business model that telcos are comfortable with. A cloud service is utility-based, has a rate plan, is pay-as-you-go – all of which are features of a business model that a network provider is used to and can relate to.

Network operators have the real estate and the connectivity, so surely this is where the threat to commercial datacentre operators lies? Bolar cites the example of a US semiconductor company that found it was unable to make a business case for moving its datacentre to the cloud after speaking to commercial operators about its requirements. But once it had laid out its requirements to its network service provider, the business case became much easier to make.

Bolar says many companies will be looking for the same commercial arrangements. “Ten years ago, enterprises were investing in building out datacentres and now nobody is,” he says. “Companies don’t want to put their capital dollars into building datacentres, so commercial datacentre providers have to offer infrastructure as a service to enterprises or they will struggle.”

But despite business models, the threat from telcos is limited, according to Caroline Chappell, senior analyst at Heavy Reading. “Everybody thinks telcos should be able to do cloud and there are a handful of very advanced businesses that are successful – BT, Orange Business Services, AT&T, Verizon, Interoute are some examples – but Heavy Reading’s research shows telcos are still not grasping the opportunity,” she says.

There are aspects to the predicted growth in cloud services – and the expansion of datacentres that will sit alongside it – that will give an advantage to a telco over a commercial datacentre provider. One of them is footprint in a country. Another is the ability to offer a single, end-to-end service-level agreement (SLA) for customers that buy network and cloud services.

The market is varied. There are examples of ‘co-opetition’, with telcos running their cloud services from a third-party datacentre. If a telco is trying to provide an Amazon-type cloud where network and infrastructure are not joined up, they are likely to enjoy some success in their own backyard. There will always be enterprises in Italy that will trust Telecom Italia over Amazon, for example. But on a global level, there is choice and some bigger telcos are investing in datacentres around the world  in a bid to compete with IBM and Microsoft.

Still on the starting blocks

Many telcos are not yet off the starting blocks, says Chappell. Instead, they are just “talking the talk”, or taking technology off the shelf from a big supplier and hoping the market will come. “You would think telcos have all the ingredients for making cloud work,” she says. “The most advanced ones are joining up the cloud with the network and providing secure private virtual cloud and hybrid cloud. Most, though, are just paying it lip service.”

Chappell adds that the successful ones have realised that they either need either to invest in development work or buy in expertise from outside.

The most advanced telcos are providing secure private and hybrid cloud. Most, though, are just paying it lip service

Caroline Chappell, Heavy Reading

Bolar adds: “Telcos still need people who understand enterprise requirements. They need to do the right sort of marketing and put in the right sort of solutions expertise.”

Many telcos just don’t get it, says Chappell. “Who are telcos competing with?” she asks. “Amazon, IBM and so on. How many people manage the Amazon cloud and how many people work in a telco? Cloud should be a lean operation, with as much automation as possible. Again, telcos by and large don’t understand lean processes and they don’t like automation. They don’t trust it.”

Chappell says this lack of trust even extends to a telco’s traditional bread-and-butter business – the network. This is because to make cloud work for enterprises, the network has to be automated. “The network is the stumbling block,” she says. “You can spin up a virtual machine in minutes, but connecting it across a VPN outside the datacentre can take months. Even setting up virtual LANs within a datacentre is a manual process for most operators. 

“Operators should be able to spin up a VM with automatic connectivity – that’s the whole goal of software-defined networking (SDN). Even if there is SDN within the datacentre, that has to be mapped out to the wide area, to the customer. It matters to an enterprise how quickly it gets service, and how flexible its VMs can be.”

Interoute picks up the pace

One network operator Chappell thinks has “got it” with regard to automation and SDN is Interoute. Its cloud business has won plaudits from the analyst community. It is a Gartner Magic Quadrant leader and was named 2014 IaaS Telecoms Provider of the Year by Frost & Sullivan. It has a converged network and compute platform – a virtual datacentre – and claims to be the owner-operator of Europe’s largest cloud services platform, with nearly 200 datacentres and co-location facilities to America, Africa, Asia and network partners around the globe.

Interoute CTO Matt Finnie says the fastest-growing part of its business is now “datacentre computing type business”, accounting for one-third of incremental revenues. He says many enterprises that have traditionally had some co-location and some datacentres are now consolidating, as are online businesses that might have had scattered datacentres.

“People have started to realise that if they want to make a datacentre investment, it makes no sense for them to do it themselves,” says Finnie. “That penny is starting to drop. People are saying ‘skip the change in topology and the ideology; you can save me the hassle of buying a rack, powering it up, putting boxes in it and have someone walk around every now and then and check it’. For a lot of our customers, it’s not a case of converting to a new religion, just buying simpler.

In the past, everyone had a datacentre. Now people are saying it doesn’t make a whole heap of sense

Matt Finnie, Interoute

“Look at what’s happened to networks. Only the very biggest build their own networks – Google, Facebook, Amazon, or a bank with a huge IT department. I think the same is happening with computing. In the past, everyone had a datacentre. Now people are saying it doesn’t make a whole heap of sense.”

Finnie believes that as cloud services become commonplace, both commercial datacentre operators and telcos will need to examine their business models. “A virtual datacentre is part of the network,” he says. “Our virtual datacentre is a couple of racks which we insert next to our core routers. We add, on average, 700 machines at a go every time we drop in one of these pods [performance optimised datacentres] – and we’ve been doing this for about two years now.

“The problem for the real estate guys is that they don’t have a network. They’ve previously made a virtue out of the fact that an enterprise has a choice of network provider. That’s great if you’re building from scratch, but if you’re buying it as a service, it’s not so important. We’ve automated everything. The first thing a customer does is choose the network, public or private, and we don’t charge for it.”

Clearing the hurdles

Of course, there are still hurdles to overcome. Business wants to know where the data is, who has access to it, whether it is secure, and so on. Finnie says Microsoft and Amazon have been doing cloud providers like Interoute a big favour with their marketing to reassure enterprises on issues like these. “We’re finding it’s less about size and more about skills within the corporation,” he adds, echoing Bolar’s comments.

“Businesses come to us asking how they replicate what they’ve got and then they realise they don’t need to do it in the same way they used to. Other telcos haven’t embraced automation in a big way – we’ve already done it.”

This article originally appeared in the March/April edition of DatacenterDynamics Focus

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