Can Telcos Dominate the Cloud Computing Industry?

Includes: CTL, MWW, T, VZ
by: Jeffrey M. Kaplan

A friend at AT&T, Joe Weinman, continues to pump out thoughtful blog posts regarding the rapid evolution of the cloud computing industry. His latest post on GigaOm entitled, “6 Half-Truths About the Cloud”, includes a link to a previous post which offers “10 Reasons Why Telcos Will Dominate Enterprise Cloud Computing".

I was drawn to his previous post because Joe added a link in Sunday’s post for his definition of “CLOUD” - Common, Location-independent, Online Utility provisioned on-Demand.

But, I was also compelled to respond to Joe’s suggestion that the telcos are in the best position to capitalize on the growing demand among enterprises for cloud computing services.

I was originally attracted to the technology industry in 1982 not because I was a geeky engineer but because I was an MBA student looking for a hot new market opportunity and saw the impending divestiture of AT&T (NYSE:T) as my opportunity. I joined IDC in 1983 to help launch its communications research program to track the transformation the telecommunications industry in particular, and the technology industry as a whole.

The AT&T divestiture produced a new generation of Regional Bell Operating Companies (RBOCs) promising a new era of competition and innovation. Over the subsequent years, they made numerous efforts to expand beyond communications into the data center with a variety of computer hardware sales and systems integration services initiatives with limited success.

Twenty years of infighting led to a new round of consolidation which has left only two major U.S. telecom giants still standing–AT&T and Verizon (NYSE:VZ)–along with Qwest (Q) and a wide array of secondary players. AT&T, Verizon and Qwest have succeeded in becoming important hosting companies, but they are by no means leading the market from a thought-leadership or innovation standpoint. Instead, they are delivering dependable ‘dialtone’ for companies seeking simple, straightforward hosting services.

While there is nothing wrong with delivering reliable services, in today’s rapidly evolving cloud computing environment, reliability is quickly becoming table-stakes. Businesses of all sizes seek cloud computing services which can give them greater agility, better economies and added functionality to reduce their operating costs and strengthen their competitive positions. These are not attributes which people associate with telcos.

In the past, we could attribute the failure of telcos to penetrate the data center as an outgrowth of the internal feuds between voice and data communications engineers within most mid- and large-scale organizations. Those internal battles have subsided as many organizations consolidated their inhouse staffs. But, the telcos continue to sell ‘dialtone’ and have been unable to demonstrate any real value-add in the data center.

In fact, even responding to new ideas and business models in their core communications business continues to be a struggle for the telcos. They watched landline revenues dry up as wireless services exploded. They watched traditional transport services give way to Internet services. Now, Skype is the largest international long-distance carrier.

Telcos are still struggling to figure out managed services, which have been around for over a decade, as a new wave of Software-as-a-Service (SaaS) and cloud computing services become mainstream.

I contributed a series of commentaries to the Web Hosting Industry Review (WHIR) from 2004-2007 that discussed the tremendous potential of the telcos in the hosting, SaaS and utility (now, ‘cloud’) computing arena which have yet to be fully realized.

Of course, telcos are not alone in their struggles with today’s disruptive technologies and rapidly changing customer preferences. Sunday’s issue of the Boston Globe includes a fascinating story about its own myopia which led to it missing a perfect opportunity over a decade ago to acquire a major share of (NYSE:MWW), which eventually became one of the major catalysts of the current decline of the newspaper industry.

As my friend Joe Weinman correctly states, the telcos are in a perfect position to dominate the enterprise cloud computing market. They have the technical resources, channels to market and brand equity. But, can they overcome their history, culture and other internal barriers to success?