The pros and cons of Verizon's Terremark buy

Verizon has acquired Terremark for $1.4 billion. Was the deal worth it, and how much is Terremark's cloud business actually making today? We debate these questions and more in this week's episode of Cloud Cover TV.

And check out the Cloud Cover TV home page for the rest of the episodes.

Read the full transcript from this video below:

The pros and cons of Verizon's Terremark buy

Jo Maitland: Hi and welcome to Cloud Cover. This is our weekly show
on all the news in the cloud computing market. My name's Jo Maitland
in San Francisco.

Carl Brooks: And I'm Carl Brooks here in Boston.

Jo Maitland: So hey, Carl, there's no getting away from the big
news this week, it's everywhere. Verizon has plunked down $1.4
billion to acquire Terremark. Is it worth it?

Carl Brooks: Yeah, good question. It's a good chunk of change, there.
Terremark last year made around $400 million; they're not even the
biggest hosting provider in the U. S. That would probably be Rackspace,
which came in at about $800 million. So Verizon paid a healthy overage
for this company. Speculate why?

Jo Maitland: There's so much hype in the cloud market right now, I
think it's a lot to do with that. I think these guys also definitely see the
Amazon Web Services business coming up, and presumably they're getting
questions from enterprise customers. So from what we know, Terremark
has a footprint in the government. Do we have any more detail on that?

Carl Brooks: Sure. They're actually running a couple of the really high profile
"cloud success stories". Like, there's a website called that runs
on Terremark, a couple other public facing websites run by the federal
government. They tout it as highly secure and federal security standards,
that kind of thing. They really have made a push for very enterprise-class
and enterprise-price cloud computing deployments.

Jo Maitland: Right. So, in terms of security, is there really anything
special there or are we just talking IPSEC tunneling, or ...

Carl Brooks: It's VMWare, it's a bunch of security stuff. They have some
very good people on staff. They've developed a lot of their systems in-house.
Their security really revolves around the fact that they'll tell you what is
going on, and they go through an awful lot of audits, and they'll charge
you a fair amount of money for it as well. It's a lot of transparency, a
lot of process fees and a lot of audits. I talked to one of the guys who
helps run Terremark's cloud security, and they do dozens, literally dozens,
of audits every year, which is crazy. Most people do one a year, if that.

Jo Maitland: What were you able to draw out of the conference call that,
I guess the CEO...yeah, they were on the phone this morning?

Carl Brooks: Yeah, Lowell McAdam, head of Verizon. What I pulled out of
that was that cloud was secure, and Verizon was secure, and there's cloud,
and there's cloud, and there's cloud, and secure. They clearly are trying to
come at this for the enterprise audience. They're really hitting all those
buzz words and what they think are the barriers to adoption for cloud in
the enterprise. So it was very, even aside from being buzz word heavy, it
was actually fairly informative. He flat-out came out and said, we're
buying Terremark because, he called it a "classic make or buy acquisition,"
meaning that they could either build it themselves, or they could buy the
extra keys, and that's what they're doing is buying Terremark's cloud
platform, which is a couple years old at this point. It's been in
development for a while.

Jo Maitland: And what does this mean for the other standalone hosting
companies, Rackspace, Level 3, Bluelock? Are they now on somebody's
shopping list? Are we going to see a spending spree, here?

Carl Brooks: I can only assume. I mean, eight, nine months ago when
Oracle came out with its whole "we're now in the cloud business", I was
making jokes that Oracle was going to buy Equinox next, because it's the
logical next step for a big company that wants to be a cloud provider is to
actually go get the cloud, the actual computers that run the cloud. So it's
surprising actually a little bit that Verizon would have gone with Terremark
instead of Rackspace, but on the other hand Rackspace is definitely solidly
settled into the small, mid-size business as opposed to the large enterprise
that Verizon really wants to get.

Jo Maitland: And I guess a 35% premium, which is what they paid for
Terremark, for Rackspace that would be $5.5 billion for the same premium,
so it's a lot more money, too.

Carl Brooks: Yeah, that's a good sized chunk of change, and I don't think
Rackspace would expect anything less.

Jo Maitland: Yeah.

Carl Brooks: They're also clearly in the forefront of this, it's just that they
have different customer bases. Who knows? Dell might be a good fit. They
like the little guy. I don't know if they have that kind of cash kicking
around after their little spending spree last year, but it's definitely a
sign of the times, and it's a sign of where cloud's going. It's all
eventually going to end up at these really, really big providers. It's
going to become centralized and sold from a place where people can actually
save money and get those economies at scale.

Jo Maitland: I can see IBM, HP eventually buying their way in here, too.

Carl Brooks: Yeah, for sure. IBM has its own data centers they're very proud of
those, but HP, yeah. They could own a data center or two. The other thing
to bring in, too, is that Terremark kind of had a missing piece of the
puzzle for Verizon. Verizon's got big, and I mean big, hundreds and
thousands of square feet of data center space all over North America,
Canada, northern Europe, middle Europe, a good presence in Asia. They got
nothing in South America. Terremark is by far and away the biggest hosting
provider in South America. They also own NAP of the Americas, which is the
single biggest connection exchange in Miami. That means that Terremark has
the pipe to South America, they have the data centers in South America. But
now Verizon gets those, too. So both companies get access to markets they
couldn't really have otherwise tapped in to.

Jo Maitland: Interesting. Does it mean that Terremark customers all now
have to use Verizon for IP networking?

Carl Brooks: Yikes. I hope not. Verizon's not exactly known for their stellar
customer service there. The CEO, Lowell McAdams, said that right now
nothing changes at Terremark. The management team stays in place, they are,
and I quote, "free agents," and they're going to run their own show. In
fact, he actually said he was eager to turn data center operations control
of Verizon's data centers over to Terremark, which I find dubious, but it's
an indication that he's really confident that he's buying some expertise
rather than simply buying a commodity to be picked apart and made money on.

Jo Maitland: Yeah. I'd be curious to get Werner Vogels' impression at Amazon Web
Services. I remember asking him once who he thought his competition was,
and I suggested maybe it was the Telcos, and he literally laughed himself
off his chair, almost. I wonder if he might be taking Verizon a little more
seriously now after this acquisition.

Carl Brooks: Yeah, I can actually see him laughing himself right off the chair,
and then getting up and making a few phone calls right away afterwards. I
think clearly that's where it's going to go. I mean, who has the bandwidth,
who has the data center space? It's the big telecoms. They're the natural
place for both cloud to be implemented and for cloud to develop in its,
sort of, final resting place in the market. That's not to say that people
aren't going to be using Terremark the way they are now. The vast majority
of their business is still dedicated hosting, virtual hosting, and not
cloud computing. Cloud computing is an eensy-weensy tiny bit of their
revenue, like it might be $28 million last year, maybe.

Jo Maitland: Right.

Carl Brooks: So it's really a very, very small part of their business. It's just
clear that it's going to be the dominant trend.

Jo Maitland: Yeah, it looks like the incumbents are ... It reminds me of AT&T
in the '90s. The incumbent telecos buying their way into new markets. It's
kind of that all over again.

Carl Brooks: Yeah, it is in a way. It seems like it's a little early for that in
cloud computing, but there's definitely a feel for that. Let's not forget
what came along with that, as Telco's consolidated, service levels went
down drastically. The air waves abound with horror stories of getting
bought by one communications carrier, getting bought by another and service
just going straight out the window. It was a lot of heartburn for a lot of
IT people and a lot of communications people came along with that
consolidation. So we may be set for that in cloud as well.

Jo Maitland: I know you talked to some users who are worried, that will
Terremark actually be able to expand? Are its processes internally able
to expand to the degree that Verizon's hoping without breaking?

Carl Brooks: Yeah, good question. The hosting business is a margin business.
They're already running on margin. The technological cloud platform part,
they seem to have down. It's mostly VMWare, VMWare's doing that for them.
That part, whether or not they can provide the services there, or whether
or not they can provide all the stuff around it: customer support, levels
of service, responsiveness, that's the sort of grease that keeps a service
moving smoothly. That's in question, for sure. And like I said, Verizon,
pardon me for saying so, but Verizon's not exactly known for its absolutely
awesome customer service. It's really quite the opposite.

Jo Maitland: Right, yeah exactly. And the telecos have been very good at selling.
Pretty much their services are like selling sugar, they're different
colors, different types of sugar, but essentially all the same thing
whereas IT services are so much more customized, and cloud services, I
think, increasingly will become richer, and it will be interesting to see
if a Telco can get that kind of customization going.

Carl Brooks: Yeah, for sure. You've got to hit that balance between
commoditization, which cloud computing is, essentially, a commoditization
of infrastructure, and offering all the things that IT people want, which
is basically control, customization, and access to really make
infrastructure do what they need it to. So it'll be a fine line to walk. I
will definitely say Verizon is wise to take the stance that it's going to
let Terremark do its own thing for a while.

Jo Maitland: Great. Thanks, Carl.

Carl Brooks: Thank you, Jo.

Jo Maitland: This was Cloud Cover. Thank you for watching, and tune
in next week for all the juiciest news in the cloud computing market.

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