Has the Cloud Strategy of Major US Telcos Failed?

November 24th, 2015 by · 22 Comments

This Industry Viewpoint was contributed by David W Wang

Starting approximately from the year of 2008, major US telcos like Verizon, CentruryLink, AT&T, Sprint all have started to embrace the cloud computing strategy so as to “move up the value chain” and re-position themselves from legacy network to IT platform service providers.

Back then, the optimistic observation from the industry was that cloud computing would make a natural fit and be the new growth engine for the major telcos, who once own both the cloud and network, as well as content and mobile services, will easily take over the market and become the next generation telecom and IT powerhouses. Their ambition has been to compete and beat against rivals like IBM’s cloud integrated solutions and Amazon’s AWS.

Along such a growth strategy, we’ve witnessed impressive phenomena for instance, Verizon bought over Terremark – a firm of cloud and data center expertise in 2010, re-launching its cloud service as Verizon Cloud globally; CenturyLink acquired dozens of IT and cloud firms to forge its new cloud edge in the enterprise market; AT&T and Sprint have launched their mega level cloud storage services. Call it buzzword or hype, the cloud business has been hailed as the new driver for all major telcos in the seven or ten years to come.

Now six or seven years have passed by. As we enter the second half of 2015, however, the new cloud strategy seemingly hasn’t scored well as expected for the major US telcos. The momentum is going flat. Recent rumor goes Verizon may even consider spinning off Terremark and its cloud infrastructure and focus itself on the mobile services. Although Verizon just quickly denied the rumor, it can hardly deny the challenging status quo of  its cloud business strategy. In August, CenturyLink announced a new round of cutting about 1,000 jobs; By October, Sprint announced it will cut up to $2.5 billion in cost and lay off workers. So what has gone wrong? Some insight I’ve obtained through various sources is that in general the cloud turns out not to be a “real money maker” for the telcos, hence produces poor return to the huge front investment the telcos have made in this field.

Four major flaws or challenges have emerged facing or foiling the telco’s cloud computing strategy. First is the lack of strategic vision and execution power from the telco’s top leadership about how to integrate and transform the cloud component into the telecom business and make the synergy excel. The old telecom mentality on business expansion was when the company needs new footprint, then just buy some other operator over along the track. Hence when now feel the cloud is needed, the telcos just go ahead to acquire some cloud service providers (CSPs) over. But one huge difference is when a telco buys another telco, the blood or DNA is fundamentally the same and the technical, functional and operational mix wouldn’t be that difficult to implement post the merger. On the other hand, when a telco merges with a CSP, there’s quite some vertical gap to fill in between the different service and technical layers that either party has originally focused on. Taking hardware as an example, legacy telecom data centers, as the telcos own so many of them across their service footprint,  are often at odds to scale up and integrated with the next generation cloud infrastructure. Unless a leader has the rare cross service and technical layer experiences and insight and can envision what right buttons to push, the telecom and cloud collaboration wouldn’t be easy to material or might even fail. By the end of the day, without a seamlessly integrated new portfolio of network and cloud to offer to the market, the telcos can hardly achieve solid tractions to move the new lines of business forward.

Second is the tough alignment in sales and marketing for the telco’s cloud offers. With the initial excitement of cloud merger and acquisition, the telco would start to charge their sales force to sell the cloud solutions to their incumbent telecom base, meanwhile network services to the newly acquired cloud customers, expecting the offers can be deemed complementary and well taken by the clients. Unfortunately neither the legacy telco sales nor newly joined cloud sales seem to be ready to cross-sell the “new services”. The companies might have rolled out massive training and marketing programs both internally and externally to educate the sales and customers, however taking training is the only first step for effective sales to happen, just like a new college graduate won’t make to a productive employee overnight. Even worse, some sales people, depending on their background, motivation, and skill set, may become non-trainable for taking on such new stuff as cloud computing or advanced network solutions and products. Some telcos have taken the radical approach to “change the blood”, but the tradeoff is the new hires don’t own the seasoned relationship and connections with the incumbent customer base, hence causing the new business very slow in taking off.

The third dilemma is the resistance of customer adoption of the telco’s re-positioning or re-branding in offering cloud-centric services.  Over so many years, the major telcos’ brand has made name as a network or transport service provider, while IT and cloud was regarded as another sector of expertise handled by different vendors. Now when suddenly the telco sales force start to pitch cloud service to their clients, the first problem they might face is the wrong audience from the customer side, who most likely are made of their network counterpart knowing little on cloud computing. The second problem is even though the telco sales may finally get routed to the right IT department of the customer side for cloud services, the IT guys probably wouldn’t take cloud offers seriously from, in their eyes, the telco sales people, which would lead to few cloud sales eventually.

The fourth challenge is the competition from incumbent IT player like IBM, Microsoft and Amazon, and new OTT (over the top) players like Apple, Facebook, and Google, in terms of cloud and related services, is getting white hot and grabbing large chunk of market share away from the telcos. Compared to the incumbent IT firms, the telcos don’t have that in-depth expertise in handling comprehensive cloud work and projects; For instance, the AWS brand is becoming too strong for public instant cloud applications and storage for the telcos to compete with. Compared to the new OTT rivals, on the other hand, the telcos are being bypassed in the business model to serve today’s market. For example, when more people especially the young customers are using smartphone app and social media to connect each other globally, or watch more stream video over the mobile devices, that market is taking the OTT trend and leaving the telcos behind.

In summary, although a lot of new approaches and efforts have been attempted, cloud-computing service seemingly remains an “outsider” to the major US telcos. This is not to downplay the importance of cloud computing. As a matter of fact, the telcos may find the cloud and virtualization can benefit them from different angles like the network revamp for SDN (software driven network) and NFV (network function virtualization), which will increase network operation efficiency, enable better customer services, and also reduce the network costs exponentially. After all, the critical lesson learnt is that if the telcos really want to cash in on the cloud meanwhile avoid it to become a distraction, they should by all means try to embed cloud solutions into their core competence.

David W Wang is a senior telecom/IT business development consultant based in Washington DC metro and author of the new book “Cash in on Cloud Computing”。 David can be reached at wt2012@yahoo.com

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22 Comments So Far

  • Greg Hough says:

    I agree with your behind the scenes business reasoning on the flat line of these products. Looking at it from a customer point of view, trust and service are the true reasons these products fail. Companies today need IT to be more responsive and nimble than ever before, and ATT, Verizon and Centruylink are no where near any enterprises view of nimble or responsive.

    • Anonymous says:

      Spot on. In fact, telcos have dug themselves such a hole by being one of the least responsive and proactive technology entities that exist, so its no wonder an Enterprise scoffs at letting them in the door to handle something that’s not an afterthought commodity.

      In that same vein, though, I’ve been witness to the broken R&D methods of them all, too. They are so addicted to the static, physical infrastructure their vendors have forced them into for decades, that they cannot act nearly fast enough. Their entire culture is built around it, whether you are talking about the onerous house of cards business case; or the waterfall method of delivering half-witted capabilities years too late.

      It’s just not in their DNA.

  • Anonymous says:

    Well said. Very rigorous analysis.

    I work for one of those telcos. We will continue to fail for one simple reason:

    We are still the phone company.
    We are not a technology innovator.

    • a non says:

      and, telco’s are quite profitable doing it the way they have always done it, right?

      • Anonymous says:

        Profitability tends to follow lack of meaningful competition. When competition is healthy, margins are low. When competition is scarce, profits get real fat. Look at Wireless vs. Landline Telco’s. Razor thin in landline and fat cat in wireless.

        • a non says:

          wouldn’t you need to differentiate between traditional wireline and the newer breed of fiber-based providers? the competitive telecom trends EBITDA margin graph hasn’t been updated since ’14 qtr 2 but margins look pretty good for some of these providers – Zayo above 50%

          • Odd says:

            This is because of local monopolies/oligopolies. Compare their margins in NYC to their margins in Albuquerque: night and day.

          • Anonymous says:

            ok, i was talking about profit margins, not ebitda. When you look at profit margins, the previous point makes the case vs. old or new wireline provider. take a guess what the profit margin is on a copper line that’s been installed and paid for, serveral decades ago?…lol

          • Rob Powell says:

            FYI, the competitive trends graphs have now been updated!

  • Ananymous says:

    The failure of US telcos in cloud is not because of lack of a concrete strategy but because there is no strategy at all. While AT&T and Verizon have grossly ignored cloud and accepted failure as they know that they can not compete with the likes of AWS, MSFT, Google etc. Centurylink has actually not failed in cloud but are seeing slow growth, which is temporary. AT&T and Verizon are currently focusing on providing secure network connections (AT&T Netbond and Verizon Secure Cloud Interconnect) to connect multiple public clouds. They want to play the role of network which makes sense because they are expert in it. Sprint does not require a mention here as they are not doing anything in this segment

  • simple says:

    Well the way we approached the issue where I worked (none of the above listed) is we didn’t get into the cloud business. We let AWS be the top of the food chain there (didn’t see us outdoing them) and just provided the pipes to AWS. Thats really what we wanted anyway. Isn’t cloud a serious security risk? Seems like common sense it is. It’s way too big of a target to not be.

    • Anonymous says:

      “seems like common sense?”

      Failure to understand the technology is another reason the telcos shouldn’t be in it.

  • Anonymous says:

    It’s rather logical. Landline carriers core competencies tend to be connectivity and voice call routing. Their provisioning systems are often a patch work of homegrown legacy applications that take monumental feats to administer and update. Software and Server Hardware service providers tend to have much better expertise in cloud just because that is their core competency.

  • Anonymous says:

    More news for Centurylink: http://seekingalpha.com/news/2956236-centurylink-losing-top-two-cloud-execs-may-refocus-strategy

    Its been somewhat vague what the success was with the cloud acquisitions (excluding Savvis). I had thought their moves were smarter than the rest as Tier 3 was quite decent, and they actually decided to keep the senior members and let them run the show instead of interject the telco asshattery.

    Perhaps it didnt work after all.

    • Anonymous says:

      This is pretty sad and a clear sign that telcos are folding the tent of public IaaS offering. what a shift of direction!

    • Anonymous says:

      Timing is interesting as it is almost right at two years since acquisition of Tier 3. I wouldn’t expect the exiting execs to say so, it may simply be a case of their retention agreement coming due, and they decided not to keep whipping themselves with ILEC bureaucracy.

  • Anonymous says:

    After the cloud bubble gone for the telcos, wonder what will be the growth drivers next?

  • Frank says:

    Verizon Shutting Down Public Cloud, Gives Users One Month to Move Data
    Yevgeniy Sverdlik | DCK | February 12, 2016


    fac: I seem to recall a similar turn of fate for the then Baby Bells and Bellcore during the late Eighties, about five years after the AT&T divestiture, during which period a surfeit of AT&T-made 2B2 computers was slated for providing “information services”, such as Disaster Recovery, Storage, Remote Processing, etc., only to fizzle out within a couple years…

  • Grant Lewis says:

    I am really surprised that VZ is doing this. I agree mega cloud competition is difficult but what i don’t understand is why customers don’t see the value in purchasing a network service with QoS from a carrier like VZ for which they will run their cloud services over. From an end to end service offering it seems to be more secure. Guess the big carriers can’t figure out how to turn the corner and sell high level value added application services.

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