Verizon, AT&T Take On Amazon.com In Cloud Battle

Amazon is the leading seller of cloud services, but AT&T and Verizon Communications hope to attract customers by pitching cloud services that play to their strengths — providing secure and reliable network connections over the Internet.

Phone companies operate data centers filled with racks of servers they rent to users, like Amazon, Rackspace Hosting (RAX) and others. They aim to set themselves apart with service contracts that spell out communications guarantees.

Telecom providers need to find new growth engines for landline phone networks. Besides AT&T, Verizon and CenturyLink (CTL) in the U.S., Japan’s NTT and some European phone carriers have jumped into cloud services.

It’s a crowded field. Internet companies, software suppliers, system integrators, Web-hosting firms and computer makers are all chasing cloud customers.

It’s key for telecom firms to stick out from Amazon and other providers, says Camille Mendler, an analyst at U.K.-based research firm Informa Media.

"If telcos go head-to-head with the pure-play cloud players or try to copy Amazon, they’ll lose," Mendler said. "Yes, they want to rush into infrastructure-as-a-service. They need to build data centers to host that infrastructure.

"But it can’t be just about computing and storage. Selling network connectivity, unified communications, is where they need to be."

Verizon last year bought Terremark for $1.4 billion. CenturyLink bought Savvis, which operates data centers, for $2.5 billion. AT&T hasn’t ruled out cloud acquisitions.

It’s too soon to judge the Verizon and CenturyLink deals, says Forrester Research analyst James Staten. "They’ve acquired early leaders in cloud computing, particularly Verizon," he said. "To have staying power, they need to mix cloud into their overall businesses.

"AT&T seems to have the most challenges right now. They’re home-growing IaaS."

Some rivals doubt the telecom business culture is suited for cloud computing, where technology changes rapidly and customers can need a lot of help.

"Telcos are fixed-asset businesses, not service businesses, so we feel good about our ability to compete against them in a high-touch market," said Rackspace President Lew Moorman. "The only time you talk to your cell-phone provider is when there’s a billing problem. (But) deploying complex Web apps in the cloud is an extremely high-touch, complex service."

Terremark and Savvis sell cloud services, but their core business has been basic Web hosting. Terremark garnered about 13% of its revenue from cloud products at the time of Verizon’s acquisition, with the rest from Web hosting. Savvis was about the same, analysts say.

Rackspace, seen as a possible takeover target itself, gets less than 20% of sales from cloud products, the rest from Web hosting. But Web hosting businesses are morphing into cloud-based services.

Phone companies say it’s still early for cloud computing. While companies have let third parties run websites or build out server farms for them, what’s different in the public cloud is that computing resources are shared.

Most large companies are still figuring out how much they want to jump into the public cloud, says Kerry Bailey, chief marketing officer of Verizon Enterprise Solutions.

"The idea of trying to offer IT (information technology) as a service has been around since the 1990s," he said. "What we didn’t have then is (corporate) acceptance. Now, every (chief information officer) is talking about the cloud."

Bailey says fatter communications pipes that span the globe are making cloud services more popular. Still, many users are wary of running business applications in shared computing facilities.

Bailey says security is key as companies build private cloud networks, basically internal data centers designed to interact with shared, public facilities.

Verizon’s push into cloud computing goes back to its purchase of security firm CyberTrust in 2007. In 2011, it acquired CloudSwitch, whose technology makes it easier for companies to run business applications in shared data centers.

"It’s all about helping companies put applications in the right spot, whether it’s co-location, a hosted environment or the cloud," Bailey said.

CenturyLink’s purchase of Savvis tripled its data-center capacity. With 50 data centers, CenturyLink is No. 2 behind Equinix (EQIX), which has 64. Verizon has 47 data centers, 13 of which came from Terremark. AT&T has 38.

AT&T acquired USinternetworking in 2006 for $300 million. That deal put AT&T in the more traditional data-center business of selling space, power and high-speed phone lines. Through the Terremark and Savvis deals, Verizon and CenturyLink have moved into broader, managed cloud services.

AT&T’s strategy of building out data centers on its own is working, says Steven Caniano, senior vice president in AT&T’S business solutions group.

In the precloud days, AT&T was often viewed as a likely buyer of Web-hosting firm such as Exodus Communications. Exodus went bankrupt in the 2001 dot-com bust.

"In the late ’90s, early 2000s, people went nuts with data centers, just as the economy headed south," Caniano said. "Many firms have learned from that. We were prudent in our investments. We’ve built our cloud business over time in a nice fashion.

"Without a robust network, you just don’t have an effective cloud."