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Why Verizon Communications Inc. Killed Two Public Cloud Services

By Leo Sun - Feb 17, 2016 at 2:10PM

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The telecom giant retreats from the crowded public cloud market.

Verizon (VZ 0.57%) recently announced that it will shutter two of its public cloud services, Verizon Public Cloud and Reserved Public Cloud services, on April 12. However, the company will keep its on-site Verizon Private Cloud (VPC) and Verizon Cloud Storage services active. Let's take a closer look at Verizon's frequently overlooked cloud business, and why it's retreating from the crowded public cloud market.

Source: Pixabay.

Why Verizon's public cloud business exists
Back in 2011, Verizon bought data center operator Terremark and cloud software start-up Cloudswitch to expand its cloud operations. In late 2013, Verizon announced that the new unit had tripled the infrastructure density at seven of its cloud data centers. Verizon subsequently launched Verizon Cloud Compute and Verizon Cloud Storage, which respectively targeted Amazon's (AMZN 2.90%) EC2 and S3 storage service.

Like many telcos, Verizon noticed that although regular network services had been commoditized, it could boost enterprise revenue with "stickier" value-added cloud products. Gartner analyst Lydia Leong noted that Verizon "understood that it would have to build technology, not depend on other people's technology, if it wanted to be a truly competitive global-class cloud player versus Amazon."

Why it never became a contender
Unfortunately, Verizon's public cloud services failed to catch up to market leaders like Amazon and Microsoft (MSFT 1.99%). Last quarter, Amazon claimed that its AWS (Amazon Web Services) IaaS/PaaS platform had an annual run rate of nearly $10 billion. Last October, Forrester Research estimated that Microsoft's answer to AWS, Azure, had an annual run rate of $1.6 billion. Microsoft's entire cloud business, which includes big SaaS products like Office 365 and Dynamics CRM, had an annual run rate of over $9.4 billion last quarter.

Verizon's exit from the public cloud market was also likely caused by the ongoing price war between Amazon, Microsoft, and Alphabet's (GOOG 2.16%) (GOOGL 2.09%) Google. That "race to zero" started in early 2014, when Google dramatically slashed prices on its cloud storage, on-demand computing, and data analysis services. That move flushed many second-tier players out of the market.

Verizon lists its cloud business as one of its "strategic services", which is lumped together with higher-growth wireline services like dark fiber, wavelengths, security services, conferencing services, and Ethernet VPNs. Last year, those services generated $8.2 billion in sales and accounted for 63% of the company's enterprise wireline revenues. However, the public cloud business likely represents just a tiny, undisclosed sliver of that total.

Verizon pivots away from the enterprise market
Verizon's wireline revenues dipped 1.8% to $37.7 billion in 2015, but its wireless revenues grew 4.6% to $91.7 billion. That's why Verizon started shedding its wireline and enterprise assets to invest more heavily in its wireless business.

Last December, it sold a large portion of its landline phone, ISP, and TV services to Frontier Communications for $10.6 billion. In January, reports indicated that Verizon planned to sell its data centers for $2.5 billion. The closure of its two public cloud services would complement that sale.

Meanwhile, Verizon is diversifying into new markets. Last year, it acquired AOL for $4.4 billion to extend its reach into display ads and online content. To expand into streaming video, Verizon launched its Go90 mobile video service last October. These moves all suggest that Verizon is trying to evolve into a nimbler business that isn't tied down to aging enterprise wireline customers.

Verizon's Go90 video service. Source: Verizon.

Verizon isn't giving up on the cloud... yet
Verizon might have retreated from the public cloud, but it isn't giving up on the cloud market yet. A Verizon spokesman recently told The Register that the company "remains committed to delivering a range of cloud services for enterprise and government customers and is making significant investments in its cloud platform in 2016."

This probably means that Verizon will focus on private and hybrid cloud installations instead of the public cloud market. Verizon already started integrating its private clouds with AWS in 2014. Last November, it introduced a new service, Intelligent Cloud Control, which enables its enterprise wireline customers to directly connect to AWS, Azure, and other cloud platforms. In early February, reports claimed that Verizon and Google could form a strategic partnership to jointly develop hybrid cloud solutions.

Those partnerships are clever, because they enable Verizon to stay invested in the cloud without the costly burden of running its own public cloud services. In my opinion, Verizon's exit from the public cloud market is a smart move which will help streamline its overall business.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of and Verizon Communications. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and The Motley Fool recommends Gartner and Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
$44.94 (0.57%) $0.26
Microsoft Corporation Stock Quote
Microsoft Corporation
$287.93 (1.99%) $5.63
Alphabet Inc. Stock Quote
Alphabet Inc.
$119.07 (2.09%) $2.44, Inc. Stock Quote, Inc.
$141.82 (2.90%) $3.99
Frontier Communications Corporation Stock Quote
Frontier Communications Corporation
Gartner, Inc. Stock Quote
Gartner, Inc.
$299.73 (2.04%) $6.00
Alphabet Inc. Stock Quote
Alphabet Inc.
$120.04 (2.16%) $2.54

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