Verizon-Terremark a Win-Win

Yesterday Verizon and Terremark announced a definitive agreement under which Verizon will acquire and operate Terremark as a wholly owned subsidiary under the leadership of Terremark’s current management team.

This announcement is a win-win for both companies, and is external confirmation that the Cloud Computing market is a key propellant of future growth in the information technology sector (see “Key SaaS, PaaS, and IaaS Trends Through 2015 – Business Transformation Via the Cloud”, 834SSR, 17Jan2011).   

At a megatrends, level, the Terremark acquisition is clear-cut evidence that while Verizon appreciates the strategic value of IaaS, it also is  objective enough to know when to go outside to acquire the necessary competency (vs. attempting to organically develop).   This is not the first time Verizon has acquired strategically critical assets—its acquisition of MCI Worldcom, which propelled it from a tier 3/4 enterprise WAN services provider, to tier 1, is another example.  Another example is its acquisition of Cybertrust, which helped create much of the necessary foundation to fill a long-gaping hole in the company’s security portfolio.

As Verizon has recently demonstrated through these acquisitions, and its aggressive stance against AT&T Mobility in the rollout of LTE and in competition for Apple iPhone and iPadusers, it has both the will and the financial resources to make the level of commitments necessary to propel it into the role of a major contender, with a strong chance of becoming a key global market leader across several high-growth, high-margin technology services sectors. 

Unlike any of its major competitors, Verizon is the only one headquartered in a city with true international roots - New York, one famous for its level of drive and competitive spirit.  I’ve expressed concern before about how the choice of headquarters/senior leaders’ location can drive corporate culture.  Now Verizon’s major carrier rivals, headquartered in other parts of the US, can begin to fully appreciate how much a difference in culture can impact the willingness and ability to seize the moment, and by so doing, to shape the trajectory of future revenues.

Saugatuck projects that by YE 2014, 50 percent or more of NEW enterprise IT spend will be Cloud-based or Hybrid (i.e., traditional on-premises combined with Cloud-based). And, by YE 2014, 65 percent or more of NEW enterprise IT workloads will be Cloud-based or Hybrid. The Terremark acquisition highlights Verizon’s strategy to aggressively pursue the Public Cloud and Hosted Private Cloud segments of the Cloud Computing market.

Verizon’s proposed acquisition of Terremark is good for Terremark because:

•  Unlike many mega-carriers that acquire a company and then essentially destroy it via ‘integration’, Verizon plans to continue to allow Terremark to operate as a separate Business Unit, complete with its name and current management team.  This will allow Terremark to focus on its core competencies. 
•  Verizon’s global WAN of high-speed, low-latency switched Ethernet services, and far-reaching MPLS ports, can provide Terremark with a very competitive bundled (network+cloud) price.
•  Verizon’s extensive domestic and international central office network can also provide Terremark with as many new data center locations as it could possibly need.

In addition to the strategic competitive benefits discussed above, the Terremark acquisition is good for Verizon because: 

• It further legitimizes Verizon’s cloud ambitions and introduces Verizon to new customers, both at the company and department level.  Previous Saugatuck research shows that data center managers at medium and large businesses rarely consider traditional telecommunications carriers as likely providers of Cloud IT solutions (see “To Compete, Telcos Need to Shape Cloud IT Sales Strategies”, MKT798, 22Oct2010)
• It deepens or extends relationships with important Terremark partners, like CSC and VMWare, to Verizon.
• It can help to solidify and deepen relationships both companies have with common customers, such as the US GSA.