There I was, walking through the antiques market, the flower market, and the flea market in Amsterdam, and I figured, of all places, I would find a crystal ball.  I would be able to see the future.  Sadly, there was no crystal ball.  Lots of other curios, but no ball.  But, then Verizon acquired Terremark last week, and it got me thinking.  Who needs a crystal ball?

No Crystal Ball Needed Here

The Verizon / Terremark deal should not surprise too many people in that it was bound to happen.  Telcos around the world are seeing traditional revenue flatten or decline, while their market share remains constant.  To offset this, they need to find a growth market, something new.  Most telcos do not have the DNA to build something new from scratch, so thus the impetus. Enter stage left a company that has been having some trouble and you have a match.

Looking at Verizon in particular, put yourself in their shoes.  As a large service provider, they wanted a cloud offering.  They only had only 3 options: Build, Franchise, Buy.  Looking quickly at the three options:

Build:

Find a vendor, buy the tools, and build yourself a cloud offering.  Then you have to train the existing sales force, market the new offerings to new customers, and grow the business organically.  This is not easy, and were I Verizon I too would pass.  I can't build a $100M business fast enough!  This tends to be the route taken by MSPs who are truly innovating in the market.

Franchise:

I talked about this in a previous post as well.  Take a running business from a successful service provider, copy exactly what they have, and drop it into your datacenter.  Pay a franchise fee, and you have your cloud business.  You still have the problem of training your team, sales, marketing, engineering, but at least you are not trying to put together multiple vendors all by yourself.  I can also see why Verizon didn't do this one.  I do think this will be the route taken by most regional telcos.

Buy:

Find a vendor with offerings in this space and, for the right price, acquire.  If you are a large telco with cash, then this option makes sense.  It is the fastest path to a large business, and brings customers as well as marketing, sales, engineering and operational skills.  I wouldn't be surprised if other large telcos around the world continued the trend, taking a hard look at this market for acquisitions.

So What Does the Not Crystal Ball Think?

I think we will see more acquisitions over the next 18 months.  Large Telcos go after large MSPs, Regional Telcos consider smaller acquisitions and franchises.  MSPs will continue to build their own offerings as they push the envelope with new cloud offerings.  Financial analysts have made similar predictions, like in this Bloomberg BusinessWeek story, so perhaps I'm not too far off.  And while this acquisition is generating a lot of buzz across news and social media, some pundits, like Krishnan Subramanian at CloudAve, suggest that it isn't all that exciting. You can read the CloudAve post here to see what you think.

There is one problem with this prediction, and that is the rumors that Terremark was having a little trouble.  If true, Verizon has its work cut out as they bring the margin back in line (see my previous post on IaaS for why margin is such an important conversation).  Since I never did find my crystal ball, my predictions may not be repeatable with other cloud MSPs.  Multiples are really high on the likes of Rackspace, and acquisitions will be costly.  Still, I believe we are at the beginning of a trend of acquisitions that could reshape the landscape fairly dramatically.

This is pretty big news.  Anyone have a crystal ball and want to share their thoughts?