The network map of data centers operated by Terremark.

The Cloud Arms Race: Is it Better to Build or Buy?

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The network map of data centers operated by Terremark.

Is it better to build or buy? It’s a question confronted by virtually every company with major data center requirements. As cloud computing emerges as a key business battleground, a sophisticated platform and global data center network have become the table stakes. Some companies ready to make big bets on the cloud are finding they’ll need to buy their way in.

That was the case for Verizon, which said Thursday that it will pay $1.4 billion to acquire Terremark, the Miami provider whose Enterprise Cloud platform and network of sturdy data centers have made it a key player in cloud computing. Verizon is planning to build several new mega-data centers, but the delivery horizon was not near enough.

‘Classic Build vs. Buy Decision’

“It became increasingly clear to us that an organic build would not get us into this market as quickly as we would like,” said Lowell McAdam, the Chief Operating Officer of Verizon. “This is a classic build vs. buy decision. It takes time, and (building data centers) is not our core competency. This really catapults us into this space.”

Verizon joins a growing group of telecom companies who are finding that buying data center providers is the best way to expand their cloud ambitions.

  • In May, Cincinnati Bell paid $525 million to acquire CyrusOne, a Texas provider specializeing in high-density colocation.
  • Broadband Internet specialist Windstream Corp. bought managed hosting provider Hosted Solutions for $310 million in November.
  • Wisconsin telco TDS Telecom has been rolling up data center providers in the Midwest,buying Minnesota’s VISI in March 2010 and Iowa’s TEAM Technologies in December.

What’s driving the trend? Building data centers takes time and money, and cloud computing is becoming more competitive as hosting providers roll out new offerings. That reality may be prompting telecom providers todvance their timelines to play catch-up, according to Jim Ousley, CEO of Savvis Communications.

“Cloud computing requires a lot of network,” said Ousley. “The major telcos in the US and around the world have been totally focused on building out their cell networks, which is a consumer focus. They’re now looking at the enterprise market and realizing it’s the next growth opportunity. To a certain extent, the network companies haven’t been focusing on this area, so they don’t have the expertise.”

That apparently left them at a disadvantage to some of the data center specialists, according to  Forrester infrastructure analyst James Staten. “Confidential Forrester client inquiries have shown struggles by Verizon to win competitive IaaS bids with its Computing as a Service offering; often losing to Terremark,” Staten notes on his blog. “This led to Verizon reselling the Terremark solution, (its CaaS for SMB) so they could try before the buy.”

Investors Size Up Deal Prospects

Which companies loom as potential acquisitions? Savvis saw a pop in its shares on Friday as investors sought to get in front of more deals. Ousley says the company is not in active sale talks, but hopes the Verizon-Terremark deal raises awareness of the value of Savvis and the infrastructure sector.

“Our objective is to grow as rapidly as we can,” said Ousley. “The whole world is moving toward cloud services. It is a capital intensive and technical business where size and scope matter. Bigger is better.

“Clearly, there will be more consolidation in the sector,” he added. “We either acquire or get acquired, and right now we are in acquisition mode.”

Other industry CEOs see plenty of growth to come. “Cloud computing is the fastest-growing component of our business,” said Terremark CEO Manuel Medina. “It’s clear that cloud will be the platform of choice for the future.” Medina called cloud computing a “seismic shift in the way IT is deployed.

It’s certainly shaking up the data center M&A environment, a trend that’s likely to continue for some time to come.

About the Author

Rich Miller is the founder and editor at large of Data Center Knowledge, and has been reporting on the data center sector since 2000. He has tracked the growing impact of high-density computing on the power and cooling of data centers, and the resulting push for improved energy efficiency in these facilities.

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  1. -

    Since when is Amsterdam Danish?