Verizon had a busy Q1, and its Q2 appears to be no less busy. The recent announcement that it would be selling its hosting and cloud business to IT giant IBM marked a continuation of the US-headquartered, security and networking firm's move away from investment-heavy sectors while doubling down on areas of strategic growth – in particular, connectivity, collaboration and managed services. In addition, Verizon created a new business unit at the beginning of the year – Verizon Business Markets (VBM) – aimed at local businesses, state and local governments, and educational institutions in the US.

On top of the company's sale of its datacenter facilities to colocation provider Equinix, such a program of divestment of physical infrastructure would have caused more of a stir had this been 2011 or 2012. That is has not signals a maturing of the cloud and hosting services market, coupled with a more realistic view of the 'business of cloud,' the skills and investment required, and the nature of the competitive environment. Like others before it in the telco and hosting services sectors, Verizon is making some tough choices – but by doing so, will it gain a strategic advantage or risk narrowing its business to an unsustainable point?

The 451 Take

Focusing its efforts on managed networking services, managed security and professional services is a smart move for Verizon, given the lower costs, higher margins and double-digit growth rates of these sectors. And the sale of its hosting and cloud services business is a logical next step in Verizon's divestment of its physical infrastructure, following from its cell towers and datacenters. At the same time, the company's emphasis on software-based automation and integration means that Verizon does not lose access to cloud infrastructure when it needs it – it simply no longer operates it, becoming a reseller instead. This in turn strengthens its favored partner status with the connectivity and cloud behemoths Equinix and IBM. If Verizon can develop its enterprise-level relationships beyond the network level, it will bring potential new opportunities for higher-value managed services.

Managed services

Verizon Enterprise Solutions (VES) is the enterprise-facing division of Verizon, offering a portfolio of products and services in areas such as mobility, Internet of Things (IoT), business communications and related areas. For security, it provides network and gateway services, security monitoring and operations and incident response, combined with a range of professional services for security – including offerings for risk assessment and compliance, strategy and implementation and mobility management. Although not unique, Verizon's professional services are nevertheless relatively broad, providing offerings for some specific sectors, such as the payment card industry. The company was also one of the earliest in its sector to address the challenges of cybersecurity, its Data Breach Investigations Report (DBIR) now entering its tenth year of publication.

In other areas, Verizon leverages its credentials in networking and connectivity. The company's Managed Network Services group offers a mix of traditional and cloud-based services, ranging from managed WAN/LAN through virtual network services and a Software Defined Perimeter (SDP). Launched in February, this SaaS offering enables enterprise customers to proactively identify and block cyberattacks by creating a virtual boundary around their network. Verizon says that the SDP service works by isolating communications between enterprise applications and end-user devices, enabling identification and prevention of network-based cyberattacks (including denial of service, connection hijacking and credential theft) via pre-authenticated, context-aware access to enterprise applications.

Elsewhere, Verizon's content delivery network (CDN) offerings are gaining traction as part of its connectivity portfolio. In March, Distil Networks and Verizon Digital Media Services (DMS) announced an agreement to work together on an offering for customers of Verizon's EdgeCast CDN – enabling Verizon DMS to remove malicious bot traffic before it reaches customer applications without requiring extensive software modifications to websites.

While these areas do not represent the totality of Verizon's business, it is worth considering the potential that they represent. Data from 451 Research's Market Monitor service shows that the services portion of the global hosting and managed services market is growing faster than either applications or infrastructure, at a CAGR of 17.9% through 2021. Managed security services and managed network services (in the 'other' category) – are expected to grow at 16.3% and 21.5% respectively during the same time. In addition, according to 451 Research's Voice of the Enterprise (VotE): Hosting and Cloud Managed Services study, managed services are becoming a larger portion of overall hosting and cloud services spending, expected by respondents to increase from 10% to 13.3% of the total over the next two years. Hosted infrastructure spending is also increasingly being bundled with operational managed services and security services; 69.5% of respondents indicate their next hosted or cloud infrastructure engagement would be managed, rather than unmanaged or self-managed.

Acquisition and divestment

It was the April 2011 purchase by Verizon of Miami-based Terremark Worldwide for $1.4bn that provided the physical infrastructure for offering managed and cloud services portfolio at a time when the everything-as-a-service market was starting to take off in North America. With the emphasis on secure delivery, Verizon's intention at the time was to deliver a unified, enterprise IT platform, and it is likely that the remainder of the acquired Terremark hosted private cloud business is the legacy piece that was sold to IBM.

Unlike Verizon, IBM is a product and services sponge, capable of absorbing a seemingly limitless range of offerings, from large platforms such as cloud infrastructure supplier SoftLayer (2013) to smaller specialists such as Blue Wolf (2016). With GTS and GBS on hand to provide enterprise-level application management and consulting services, it can choose its direct engagements, while delegating smaller opportunities to its extensive partner network. Taking on Verizon's hosting and cloud services business underlines IBM's growing influence in the enterprise managed cloud infrastructure space. While its traditional datacenter services and outsourcing is arguably moribund, its cloud services have brought it back to profitability in the US market.

Verizon is not the first company of its kind to move away from infrastructure services in this way. Rackspace, at the time the world's largest independently managed infrastructure and cloud provider, pivoted away from selling basic cloud infrastructure (and spinning off its low-cost web-hosting operations, Cloud Sites, to LiquidWeb), taking a more services-led approach. UK-based Colt Technology Services canceled its Managed Cloud offering (the go-to-market brand for its IT Services' €80m revenue business) in 2016, selling it to German IT services company Getronics. Other IT vendors such as Hewlett Packard Enterprise (HPE) have chosen to keep out of the commodified public cloud service market, choosing instead to focus on hybrid and third-party services.

Having said that, becoming a cloud and managed service reseller is not as straightforward as might be assumed. There will be a period of adjustment for Verizon, and its success will largely depend on how well its sales teams will can leverage existing enterprise-level relationships outside the network services sector. For both Equinix and IBM, for example, there is a requirement that this could take place sooner rather than later.

Competition

Hosting and cloud are becoming increasingly competitive markets, with an ever-growing number of providers offering a range of stand-alone and bundled services – from on-premises private cloud to hyperscale public cloud with almost every combination in between. At the same time, the emerging managed security and managed applications market is growing quickly, with a smaller number of large providers – including NTT Security, TrustWave and Symantec – as well as specialists such as Secure-24, Sword & Shield and Nuspire gaining market share. On the managed network services side, Verizon still faces competition from some of its traditional competitors, including CenturyLink, AT&T and Level 3 Communications. By moving out of infrastructure hosting services, however, Verizon gains a number of new partners, further cements its existing relationships with Equinix and IBM and loses many competitors to boot.

SWOT Analysis


Strengths

Verizon's brand strength (particularly in North America), broad portfolio and network services heritage gives it strong credentials as a managed service provider, particularly in technology innovation.

Weaknesses

Despite a clearer articulation of its strategy, Verizon's divestment of its physical infrastructure has caused uncertainty for some that may believe it is abandoning core offerings, rather than changing its GTM model in some areas of its business.

Opportunities

Verizon's ability to leverage its managed security and network services capabilities – especially in cybersecurity and connectivity – will be a critical success factor, given the rate of growth of these markets in tandem with other managed services.

Threats

Other cloud and managed service firms that have pivoted their businesses in such a way have faced structural, managerial and skills challenges. Verizon needs to minimize the disruption this may cause in the short term, otherwise sales traction will be lost.
Rory Duncan
Research Director, European Services

Rory Duncan is the Research Director for 451 Research's Managed Services & Hosting channel. His research focuses on the global managed services and hosting market, where he tracks IT managed service providers, web and applications hosting firms and content delivery network providers. His coverage includes services, the IT distribution channel, market sizing, M&A activity, and factors that affect the business strategies of these companies.

Carl Brooks
Analyst, Service Providers

Carl Brooks is an Analyst for 451 Research's Service Providers Channel, covering cloud computing and the next generation of IT infrastructure. Previously, he spent several years researching and reporting on the emerging cloud market for TechTarget. Carl has also spent more than 10 years supporting small and medium-sized businesses as an IT consultant, network and systems integrator, and IT outsourcer.

Keith Dawson
Principal Analyst

Keith Dawson is a principal analyst in 451 Research's Customer Experience & Commerce practice, primarily covering marketing technology. Keith has been covering the intersection of communications and enterprise software for 25 years, mainly looking at how to influence and optimize the customer experience.

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