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Verizon’s rumoured datacentre sell-off: Why telcos are turning their backs on colocation

Reports suggest US comms provider Verizon will become the latest telco to sell off its colocation assets, but what is driving this trend?

The colocation sector was a hotbed of merger and acquisition activity during 2015, and if reports of Verizon’s great datacentre sell-off are anything to go by, this year will be no different.

According to a recent report by Reuters, the US telco giant is to auction off 48 datacentres in the US, with a view to raising $2.5bn, as part of a wider push to refocus its operations around its core business activities.

Quoting sources familiar with the situation, it is claimed that Verizon has already enlisted Citigroup to oversee the sale of the sites, which bring in about $275m a year for the firm.

Considering Verizon paid out $1.4bn to break into the colocation space by acquiring Terremark in 2011, the move could turn out to be a nice little earner for it, says Tony Lock, distinguished analyst at market watcher Freeform Dynamics.

“Verizon has economic issues of its own, and has been trying to reduce the amount of debt it has from the acquisition of Vodafone’s US business in 2014,” he said.

That deal saw Verizon purchase Vodafone’s 45% stake in its wireless business for $130bn in February 2014, giving the firm full control over the direction of this sizeable, income-generating business unit.

“Ever since then, it has been trying to rationalise its offering to fit its new needs, but – from the look of things – it has decided to put more focus on telephony and the value-added services around that,” Lock added.

Refocusing the business around the delivery of telephony services would be a sensible move for Verizon, but it also indicates the difficulties telcos face when trying to operate in the colocation space.

“Delivering colocation and telco services are two very different beasts, and it really all comes down to where the businesses want to focus their energy,” said Lock.

“If they are really into cloud, colocation is similar, but different in terms of support and sales models, and the same applies to telco services.”

When approached to comment on the story, a Verizon spokesperson told Computer Weekly the company does not comment on rumour or speculation. 

Read more about colocation investment trends

If, however, there does turn out to be truth in the rumour, Verizon would not be the first telco to rethink its position as a colocation datacentre owner, having previously invested huge sums of money to become one.

Fellow telco CenturyLink also recently floated the idea of selling off its colocation assets, because the amount of money required to grow this part of its business was just too vast.

This realisation emerged four years after the firm shelled out $2.5bn to acquire Savvis with the express intention of breaking into the managed hosting and cloud computing space. 

In recent years, AT&T has also taken steps to downsize the number of datacentres it owns.

Meanwhile, numerous analyst houses have reported a steady rise in enterprise demand for colocation services over the past 12 months, according to Steve Wallage, managing director of datacentre market analyst BroadGroup Consulting.

In the light of this, telcos’ apparent appetite for divesting their datacentre assets may seem surprising, but many have good economic reasons for doing so.

“Colocation is still a good business to be in, don’t get me wrong, but the telcos always had a slightly strange relationship with it,” said Wallage.

“Clearly they’re not specialised players, some of their assets are a bit old and out of condition, and they have upgrade costs to consider.”

Whereas colocation giants such as Equinix and Digital Realty make very good margins on their services, telcos often run theirs as a “loss leader” as part of a wider cloud or outsourcing deal, he said.

“The bottom line is that a lot of telcos don’t see colocation as a particularly attractive business and would far rather be a cloud provider than a colocation one,” Wallage added.

A buyer’s market

Buying up the facilities that the likes of Verizon are selling is one way of meeting the growing demand for colocation space, but – given the age and state of some of these sites – their appeal to the wider colocation market could be relatively limited, Wallage said.

“It’s fair to say a number of players are looking at their future positioning and one of things they’re looking at is what sort of size do you need to be successful. So a lot of players are looking at how they evolve and address that in 2016,” he said.

“One of the things about some of the assets the telcos might be selling off is that they’re not exactly the best. A number are fairly small, were built in the 1990s, and are not in the best condition, which often makes them less attractive.”

Even so, they are still likely to be of interest to a number of parties, including other colocation firms and private equity investors, said Wallage.

In fact, it is not unheard of for the latter group to acquire colocation sites and then lease them back to the companies they bought them from. This is an approach CenturyLink has previously expressed a passing interest in pursuing, while AT&T has already done so at several sites in the US.

It is also likely, should Verizon’s reported datacentre auction take place, that its facilities will be sold off piecemeal to various providers, rather than all going to a single firm.

“Take Citigroup selling off its Frankfurt facility as an example,” said Wallage. “It had 15 indicative bids, and you see a lot of interest in assets that are in cities where it’s difficult to get new space, and it also means they can quickly come to market with an existing asset.”

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