Match made in heaven?

Contact: Ben Kolada

As telcos look to stem losses in their business divisions and hosters look for partners to help them continue revenue growth, the two industries are increasingly merging together. The recent Terremark and NaviSite sales have already set a new record for dealmaking between these two sectors, eclipsing the nearly $1bn worth of deals that we saw in 2010. And unlike in other industries, where companies or assets may be acquired and then squandered, the strategic potential that telcos and hosters offer each other is too valuable to be wasted, and pairings between the two industries usually benefit both sides. (Click here to check out our longer report on this growing trend.)

Verizon’s Terremark purchase represents the most synergistic pairing that we’ve seen between these two industries. But the hosting sector in general can benefit from partnering with complementary telcos. Perhaps the greatest opportunity may actually be for regional and smaller telcos (which we loosely define as providers with revenue between $100-500m) to buy smaller hosters. The hosting market is still fragmented, particularly among smaller providers, and many of these firms are experiencing capital constraints that are preventing expansion. Regional and local telcos will be able to take advantage of this fragmentation and acquire small complementary hosting providers without spending too much money, since smaller providers tend to garner smaller valuations.

Benefits for hosting providers partnering with telcos:

  • Telcos often already have some level of existing Internet infrastructure services that can be complemented by purchasing providers to round out those offerings or expand geographically.
  • Telcos have access to capital to support continued growth.
  • Telcos have long histories of service provision for both large and small business.
  • Telcos have institutional knowledge with respect to offering multiple products and services simultaneously across more than one geography, often with widely varied requirements and expertise.

Source: Tier1 Research