In 2011 we saw huge shifts at the border between telecom and internet infrastructure, as telecommunications companies of all colors and stripes took action to gain a foothold in cloud-based services. The word 'cloud' may be an over-used, under-defined buzzword, but it is now quite clear that the revolution that lies underneath it is quite real. As the telecom industry transforms in response we are seeing two quite distinct flavors emerge that in 2012 will continue to diverge.
Does the cloud favor an ecosystem based on vertical or horizontal integration? That is the ultimate question here, the one that next year will bring clarity to.
Vertical land grab
Most of the largest telecommunications providers have always seen every industry they like as one that ought to be vertical, and have moved aggressively to bring everything in-house. Verizon's purchase of Terremark, CenturyLink's purchase of Savvis, and Windstream's purchase of Hosted Solutions and also PAETEC's datacenter/cloud business and nationwide presence have all been aimed at that goal. Each hopes to be able to offer enterprise customers of various sizes everything from hosted applications to VPNs to backup to fiber access, thus obviating the need for any intermediaries at any point in the process.
But it's not just the big boys that think this way. Enterprise-focused CLECs of various sizes are looking to do the same thing. cbey has been betting on its ability to grow beyond mere bandwidth and VoIP, and others have made similar moves. With enterprises moving applications and functionality into the cloud, they hope to gain marketshare while that revenue is up for grabs.
Horizontal dreams of differentiation
The other school of thought is that for a long time after the bubble and the ensuing telecom nuclear winter many bandwidth products were thoroughly commoditized, with few opportunities for differentiation from one provider to the next. The new breed of cloud services follows the financial low latency fad in bringing back that differentiation. Not only is latency important once again in connecting customers to their clouds, but the many types of connections and network designs that customers are raising the profile of the network engineer once again.
This is the domain of the bandwidth specialists, interconnection guys, and the modular data centers, e.g. Zayo Group (news, filings), abvt, tinet, Telx Group (news, filings), Cologix (news), etc. They have been actively talking up the importance of the connectivity between the enterprise and the cloud and between the various clouds themselves. What it really represents is something that nobody wants to say too loudly for fear of jinxing it: the potential reincarnation of a vibrant wholesale bandwidth business market. You remember the wholesale bandwidth business right? The one that has been largely left for dead for years now, with even Level 3 now putting much so emphasis on the enterprise side of things. But the difference now is that the cloud brings a wider range of enterprise customers under what would formerly have been the wholesale umbrella. Serving a diverse, horizontal cloud-based ecosystem aimed at the enterprise is precisely what the old wholesale dreams envisioned - just a decade later than those visionaries of a decade ago might have hoped.
2012 will see the battle lines clarify
Which is the stronger model? Vertically integrated telecommunications giants serving more products to the enterprise, leaving Google and its OTT brethren to the consumer and to web-based advertising? Or a wider variety of horizontally oriented tech companies serving more specialized product sets over differentiated bandwidth pipes in neutral colocation facilities with advanced interconnection fabrics? What sort of cloud services do enterprises really need, and what sort of supplier relationship do they want? These questions won't be settled in 2012, but the underlying fundamental choices will become much clearer by next year this time.