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Telcos buying cloud businesses is a hot trend—but not telcos’ only option

Telecom service providers are eager to become cloud providers—and some are doing so through the purchase of existing businesses. In this Q&A, CA Technologies Senior Director of Product Marketing Matthew Richards and ScaleUp CEO Kevin Dykes discuss the pros and cons of this approach, along with other options that telcos should consider—including building their own cloud businesses or using a franchise approach.

Q: There has been a lot of news lately about telcos buying cloud vendors. Why is this happening?
RICHARDS: It’s about revenue growth. Landline telcos are seeing year-over-year revenue declines of 4% or 5%-- while retaining a constant market share. This means the traditional business of the telco – the landlines – are slowly drying up. They see cloud as a way to tap a new, high growth segment to make up for these declines.

What these telcos have is good relationships with enterprise customers. Buying cloud vendors is the next logical step for telcos to quickly add a cloud business and gain access to high growth numbers, leveraging the relationships they have.

Q: What are the pros and cons of buying an existing cloud provider?
RICHARDS: The big advantage is time to market. And risk is reduced because you can look at the books and it should be straightforward to continue on the track that the cloud provider is already on. The problem is that this is an expensive option You have to do a lot of due diligence and take the time to understand the market and customers or the product may not deliver what you thought it could deliver. I suspect some recent acquirers will find this out shortly.

Further, it is difficult to change a telco’s DNA. Telcos are reinventing themselves as cloud providers, and buying a cloud provider helps them reinvent their DNA faster. Sales, marketing, channel training are based on what is working. But retaining talented employees is a huge deal. Unless you have taken a look at the culture of the acquisition, the acquiring company can easily quash the things they most need.

Q: Is there a certain type of provider that is most likely to choose a buy strategy to enter the cloud services market?
RICHARDS: The largest telecom companies are most likely to choose the buy option – it is a matter of cash, and they have the cash. You’ll see more deals such as Verizon buying Terremark or Time Warner Cable buying Navisite in the coming months. You’ll also see smaller regional telcos buying smaller regional cloud providers.

As a rule, telcos aren’t risk takers. The bigger guys may have entered the cloud market by building a few services of their own. But now they are buying cloud providers to fill in what they started.

Q: What other options are there for telcos if they can’t or don’t want to buy a cloud vendor?
RICHARDS: Other options include building a cloud business from scratch and franchising cloud service that someone else has built.

With a franchise model, you find a service provider that already offers cloud services. They offer you their complete, installed service, operations integrations, portals, billing integfrations – everything. In exchange for working with an existing service, you pay a franchise fee, % of of your margin or maybe a stake in your company. Some companies we’re seeing that are enabling the franchise model include Joyent, DNS Europe and ScaleUp.

Q: Kevin, tell us about ScaleUp and the franchise option that you offer.
Dykes: We have a 12-year history beginning in Europe as a managed service provider. Four years ago, we built our own cloud platform, which we still offer. But our primary focus now is on making the software platform that we developed available to other service providers to enable them to get to market faster. The reality is that the platform has been proven out. It’s not just something theoretical.

Q: How widespread are each of the different methods of becoming a cloud service provider?
RICHARDS: Almost everyone who offers cloud services right now has built their a solution. This is generally very popular, and in a new market – the easiest to find.

As for the buy option, that’s most popular with the largest telcos, but you’ll also see some mid-size telcos buying small cloud vendors. The Terremark / Verizon deal is one of the most well known at this time.

The franchise model is not as far along and is less well understood, so it’s a smaller and emerging part of the market. But as consolidation continues to happen, franchising will become a more attractive option and you’ll see its share of the market grow.

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Matt Richards

Matthew Richards
Senior Director of Product Marketing, CA Technologies

Kevin Dykes

Kevin Dykes
CEO, ScaleUp