Why Verizon's Acquisition Of Terremark Is Not Exciting

Yesterday, Verizon announced that they are acquiring the cloud provider Terremark for $1.4 Billion According to Datacenter Knowledge,

Verizon will acquire colocation and cloud hosting provider Terremark for $1.4 billion in a deal that will accelerate the telecom provider’s push into cloud computing. Verizon will pay $19.00 in cash for each share of Terremark, about a 35 percent premium to the stock’s closing price of $14.05 a share.

This announcement got pundits all excited and my Twitter stream was full of it. I do find this deal interesting and a validation of public clouds but I am not super excited by this announcement and I also don’t see this as the beginning of a market altering trend. I will put forward my thoughts in this post.

First, a brief about yesterday’s news

As most of you know already, US based telecom provider Verizon yesterday announced that they are buying Terremark, VMware vCloud based public cloud provider. Terremark is one of the early players from the traditional hosting world who repositioned themselves to offer public cloud services. Unlike Amazon and Rackspace who rode the Xen hypervisor to Clouds, they went with VMware’s vCloud offering. This gave them instant enterprise credibility and helped them secure some high profile US federal government contracts.

This acquisition gives Verizon an opportunity to add public cloud services to their offerings. So far, Verizon has been a slow mover with respect to cloud and this will help them to be part of the cloud ecosystem and, if possible, use their brand to secure some big government and enterprise contracts. Especially, when the government is a big spender of IT and Obama administration has taken a cloud first approach, this moves puts Verizon’s mouth closer to the pie and I am sure they are expecting to get a larger share of the pie.

Why this move is interesting but not exciting?

I find this move interesting but I don’t share the kind of excitement of my fellow pundits. First let me explain why it is interesting and then go on to pour water on the tech media frenzy. Just 2-3 months ago, on the sidelines of GigaOm Net:Work conference, myself, James Urquhart (@jamesurquhart) and Chirag Mehta (@chirag_mehta) were discussing about how Telcos are missing an opportunity in the cloud in spite of having lots of pipes and the capability to run a cloud service. This move by Verizon signifies that US Telcos are slowly understanding the reality of the cloud based world and what they are missing by not being part of it. I specifically use the term “US Telco” because Telcos in other countries like UK, India, Korea, etc. seems to have realized the importance of cloud computing well before their US counterparts. In that sense, this is a good beginning. This also has the potential to make cloud computing more palatable to the enterprises and give a healthy competition to Amazon.

Now let me explain why I don’t share the excitement of fellow cloud pundits. Most of the excitement on this news is there because this signifies a major consolidation wave and the winner of this race will end up with large marketshare. I do not see it that way. I see it as a beginning of a wave where Telcos and other traditional IT vendors will go on with acquisition plans to fill the gaps in their arsenal as they see increasing cloud adoption. This excitement is also due to the traditional economic thinking and they see such consolidations leading to few players having monopoly hold in the market. As an open source guy, I like the economics of abundance and I see a world of open federated cloud ecosystem consisting of large number of infrastructure players than just a handful of monopoly players. When such an ecosystem emerges (well, it will emerge sooner than later once OpenStack is out production ready and other players like Eucalyptus, Cloud.com, Cloupia, etc. gain widespread traction), infrastructure services will lose its attraction compared to how it is viewed now with the traditional thinking. This is exactly why I see this acquisition more as filling the gaps than anything else.

As PaaS becomes the future of cloud services, the excitement will be around any M&A in the PaaS space. Even in a PaaSy world, we would not see the kind consolidation expected by people who see the world with old fashioned economic lens. We are going to see a federated cloud ecosystem and any mergers and acquisitions should be seen as repositioning in such an ecosystem than any big trend towards massive consolidation. Gone are the days of large monopolies. Not only the governments are watching closer, the market itself has become smarter and democratized. Acquisitions like the Terremark deal will be a blip in the screen than any major seismic or astronomical event.

Meh, anything else?

Well, this may appear more like a wishful thinking than anything worthwhile. However, if you see the real long term trend, you will notice the shift already happening. It didn’t start with cloud computing. It has started the moment open source started applying market pressures on the market dominated by proprietary software. The trend is going to accelerate more in the cloud based world. All I can say now is “let us wait and see”. Have a great weekend folks.