Later this month, TierPoint will become one of the largest regional cloud providers in the U.S., when its $575 million acquisition of 14 data centers from Windstream closes. Those data centers will be added to the 14 that TierPoint already operates around the U.S. TierPoint recently recruited Shea Long from CenturyLink to join as Senior VP of Products, and manage the product strategy for TierPoint’s growing data center and cloud assets. Long explained to the Daily Cloud that TierPoint’s strategy is to focus on tier 2 cities, and the enterprise customers in those regions that want to run mission-critical applications. He sees TierPoint’s market position as more complementary than competitive with major cloud providers like Amazon Web Services. “Amazon and Google are very dominant in certain use cases,” Long tells us. “Enterprise customers are looking to other providers with better SLAs [service level agreements], a more consultative approach, and facilities in a region they can access easily.”
Customers like to have their cloud providers nearby so they have easy access to the key resource a cloud provider offers: expertise and advice on what solutions to deploy and how to architect and configure them. “The future of IT services is bringing world-class, high-quality managed services to that next tier of markets like Philadelphia, Jacksonville, or Oklahoma City,” says Long. “Customers want to have their solution provider within driving distance. You’ve heard of server huggers? We believe there are cloud huggers too.”
TierPoint is not the only cloud provider pursuing the tier 2 city model; we’ve spoken to others with a similar approach. One benefit for the provider is that there tends to be less competition in tier 2 cities and so margins can be higher. TierPoint already operates data centers in cities like Boston, Philadelphia, Baltimore, Jacksonville, and Oklahoma City. The Windstream deal will bring data centers in additional locations such as Raleigh, Charlotte, Seattle, Spokane, Nashville, and Little Rock. The result will be a combined company with 500,000 square feet of data center space in 19 metro areas serving some 5,300 customers.
The business TierPoint is acquiring, Windstream Hosted Solutions, had annualized revenue of $122 million in Q2 of this year and an “Adjusted OIBDA” (operating income before depreciation and amortization) of $40.8 million. The enlarged TierPoint business will have revenue at an annual run rate of over $250 million, says Long.
Another feature that TierPoint likes about Windstream’s business is that both rely on VMware’s vSphere virtualization. “They have a very mature customer service portal, with self-service and tight integration to vCloud Director, features we think are important to our customers too,” Long says. Standardizing on VMware makes it easier for customers to move large applications like Oracle or SAP to the cloud.
TierPoint’s investment in enlarging its cloud business continues the recent trend of telecom companies exiting the cloud business. In recent weeks, all three of the largest U.S. telecom companies, AT&T , Verizon , and CenturyLink have been rumored to be seeking buyers for their data center assets. Shea Long worked for Savvis before it was acquired by CenturyLink, and then was with CenturyLink, so he has a good perspective on the shifting strategies of the telcos. “Five or six years ago it became the vogue for telcos to pick up data center companies. Once they got in there, they realized it is a different kind of relationship with the customer, and now you see them divesting those assets and refocusing their strategy.” Telecom companies sell network connectivity as essentially an off-the-shelf product, where selling cloud services involves a lot of consultation and individual customization of a broad range of potential software solutions to the customer’s applications. It’s proven difficult for a huge telecom company to make that cloud customer service model work and then scale it to a level that would make a difference to a multi-billion dollar telco.
Regarding the large telcos’ strategies, Long adds that selling their data center properties is “an opportunity to capitalize on nice valuations for data center assets, and take the capital and reinvests in their traditional businesses. They believe they can get out of owning the facilities but still be in the cloud services space.”
Long points out that TierPoint’s ongoing relationship with Windstream will be very clear. Windstream is far smaller than the huge telcos, and like TierPoint, focused on tier 2 markets. “We have a reciprocal sales arrangement where they will still be able to sell colocation and cloud services and TierPoint will be able to sell their network services,” Long explains. Last month, Windstream reported Q3 revenue of $1.5 billion. It also said that it will use $250 million of the proceeds it will get from selling the data center business to fund “Project Excel,” a program of improving its broadband connectivity to grow that business.
TierPoint is private and does not disclose financials. It was founded and is led by chairman and CEO Jerry Kent, who is also the CEO of Suddenlink, the U.S.’s seventh largest cable provider with 1.4 million subscribers. Earlier this year French communications company Altice agreed to acquire Suddenlink for $9 billion, and Kent moved from a nonexecutive chairman role at TierPoint into the CEO spot. Back in the 1990s, Kent partnered with Microsoft’s Paul Allen to found Charter Communications, which went public in 1999 in what was then the third largest IPO in U.S. history. Given Kent’s track record, it seems likely that further growth is on the cards for TierPoint. Windstream may not be the last acquisition.
“It’s an exciting time for us, with the cloud services opportunity in those second tier markets,” says Long. “We think we’ll have a pretty compelling footprint.”
