CenturyLink Offloads Data Centres: More Telco Divestitures to Come

CenturyLink’s recently-announced decision to sell its data centres in a £1.7-bn transaction is reflective of the telcos struggle to effectively battle with hyperscale providers in the ultracompetitive infrastructure services market.

Monroe, La.-based CenturyLink decided to sell its data centres, including the five it owns in Slough, Reading and London’s Docklands in the south east of England, partly to fund its larger £20-bn deal for Level 3 Communications. But it also represents a strategic shift away from a business model that involves data centre ownership to a company focused on connectivity services based on an expanded fibre optic network with the result being better high-speed data services for enterprises.

PAC expects more major telecommunication service providers in Europe and abroad to follow suit now that data centres are less relevant to many of their respective portfolios. The telcos at one time wanted to be dominant infrastructure-as-a-service (IaaS) players. To do so, data centre ownership was seen as necessary. But the value proposition posed by telcos to enterprises has weakened somewhat as public cloud security has improved. Also, telcos as a rule haven’t fully exploited the cloud’s potential as a development platform, which meant a corresponding shortage of tools and applications to attract developers and enterprises alike.

In the meantime, hyperscale public cloud providers Amazon’s AWS unit, Microsoft Azure and IBM have taken control of the market for outsourced infrastructure leaving little room for telcos and others. These circumstances have made it increasingly attractive for telcos to offload data centres.

Without data centres on the books, telecom service providers can still offer network services, managed hosting or cloud services as CenturyLink plans to do without incurring high, fixed costs needed to maintain the assets.

As such, it’s likelier that American operators AT&T and Verizon if not others will replicate CenturyLink’s efforts. Verizon has already said it’s in negotiations with one party to sell its data centres, with an announcement probable this quarter.

There are notable exceptions to the expected trend of data centre divestitures. NTT Communications, which owns a global data centre network that it plans to keep as the backbone of its digital services strategy, is one example. Another is Deutsche Telekom’s T-Systems subsidiary, which launched the Open Telekom Cloud this year and is still challenging the American public IaaS vendors in Europe.

There are a number of scenarios whereby telcos sell data centres in multiple transactions to private equity firms and colocation firms like Equinix. The hyperscale providers are less likely acquisitors as the companies prefer to build data centres to their specifications. Also capital isn’t an issue. However it plays out, expect to see more data centre divestitures on the part of telcos in the coming months.