What is Happening?
On 31 Oct., CenturyLink (CTL) and Level 3 Communications (LVLT) announced a definitive merger agreement, under which CenturyLink will acquire Level 3 Communications in a cash and stock transaction totaling approximately US$34 Billion.
On 4 Nov., CenturyLink announced the US$2.2 Billion sale of 57 data centers and its co-location business to funds advised by BC Partners, in a consortium including Medina Capital Advisors and Longview Asset Management.
Beyond the press releases and trade publication articles focusing on the sizes of these transactions, we see one question many enterprise IT organizations should be asking: How do these transactions impact alternatives for IT infrastructure and potential transformation to digital business?
Why is it Happening?
The telecom arena is experiencing intense competitive pressure between traditional network providers such as AT&T, CenturyLink, and Verizon, and mobile-focused providers such as Sprint, T-Mobile, and Verizon (again). All are contending for a shifting base of consumers and enterprise customers that increase revenues in an expanding variety of means, from network traffic to advertising.
ISG sees all three of these recent telco transactions as indicators of an emerging strategy within the major telecom companies: shedding non-core, and potentially declining, businesses to sharpen focus on core businesses and enable increased focus on pursuit of the growing Cloud market.
CenturyLink’s acquisition of Level 3 is intended to strengthen its core business by significantly increasing its telecom bandwidth assets. And CenturyLink’s sale of data centers and associated co-location business will provide funds to partially offset the cost of the Level 3 acquisition and enable a more narrow focus for the company. Verizon’s sale of data centers and associated customers is intended to provide funds to invest in its cellular business and narrow its focus.
At the time of the transactions, we observed that the acquisition of Level 3 would result in significant enhancement to CenturyLink (1997RA, Telecom Consolidation and Competition – CenturyLink Buys Level 3, 03Nov2016). We highlighted the benefits of the acquisition as:
- Increasing CenturyLink’s US footprint by 200k+ fiber route miles. The combined company will be 2nd only to AT&T as a provider of fiber/Ethernet.
- Significantly expansion of CenturyLink’s international reach by 300k+ fiber route miles and becoming a strong LATAM and APAC competitive presence, along with NA and EU.
- Level 3’s content delivery network (CDN) in the streaming media space is one of the strongest in the country. The is especially relevant due to the growing demands for streaming multimedia.
And, pertaining to the sale of the data centers and associated businesses we observed that CenturyLink stated its intent to “continue to focus on offering customers a wide range of IT services and solutions, including network, managed hosting and cloud.” We interpreted the transaction as CenturyLink shifting from providing traditional data center and co-location space to pursuing the market that increasingly favors managed hosting, Cloud, and high volume data transmission (2003LENS, The Other Story from CenturyLink, 09Nov2016). This approach builds on CenturyLink’s acquisition of Savvis in April, 2011.
Similar to CenturyLink, Verizon’s sale of 24 data centers is narrowing its focus and reducing its cost structure by eliminating data center and co-location services while retaining managed hosting and Cloud. This approach builds on Verizon’s acquisition of Terremark in January, 2011.
ISG sees both CenturyLink’s and Verizon’s transactions as recognition of the evolving IT requirements of many enterprises. Adoption of Cloud-based IT infrastructures is increasing both horizontally across enterprises and vertically within enterprises. Characteristics of application workloads for business units are evolving with increasing levels of data transmission due to the Internet-of-Things (IoT), the Industrial-Internet-of-Things (IIoT), analytics, support for mobile workforces, and increasingly sophisticated user interfaces.
The bottom line is that we view the CenturyLink and Verizon transactions as likely beneficial to enterprise IT organizations, as well as to both CenturyLink and Verizon . For example, the CenturyLink & Level 3 combined company will be a major competitor in the US business telecom market. We are optimistic that the combined company will result in reduced costs which will lead to more competition in the marketplace.
Verizon’s transaction will not only infuse cash and improve its overall cost structure, it should enable the company to be more competitive in the evolving IT and cellular market.
On the other side of the coin, we see the acquisition of data centers and associated customers as beneficial to the BC Partners consortium, to Equinix, and to enterprises requiring data center and co-location services – including those seeking “edge”-based storage and processing that can improve the performance of IoT and other distributed, Cloud-enabled capabilities.
As we have stated repeatedly for several years, some application workloads are not appropriate for a Cloud-based infrastructure. Further, we project a growing requirement for data center space for “local” processing within major metropolitan areas (1479STR, Infrastructure Planning: Start with the Foundation…Literally, 28Nov2014). Thus, we project that strategically located data center and co-location services will likely remain a profitable business for the foreseeable future if an efficient cost structure can be maintained.