Why does Verizon need Terremark?

On a conference call this morning held by Verizon (VZ) to discuss its acquisition of cloud computing and managed hosting provider Terremark Worldwide (TMRK), a fair question was raised: Why can’t Verizon do for itself what Terremark will supposedly do for it? After all, Verizon has its own homegrown cloud computing services, broader global reach and more capital to invest than the company it’s acquiring.

Verizon execs described the deal partly as a geographic expansion – Terremark has a better presence in Latin America, Verizon has a better presence in Asia – but much more so as a basic market penetration acceleration play: Terremark helps Verizon more quickly capture the small and medium businesses that complement its own pursuit of the enterprise-class cloud services sector.

Verizon had said previously that the reason they’d decided to resell Terremark’s small-and-medium business offering last year was because it would take too much time and effort to adapt Verizon’s own enterprise-class offering for customers down-market.

But on a conference call today to discuss the deal, Verizon execs suggested that where Terremark had really zoomed ahead was in the infrastructure needed to serve these markets. Locating and building data centers, outfitting them with the necessary equipment, efficient energy supplies and software and building a capable staff is no small task for a company like Verizon with lots of other business segments it must attend to. “It takes time,” Lowell McAdam, Verizon’s chief operating officer said on today’s call. “That’s not our core competency.”

That sounds a bit strange coming from a company with more than 200 data centers around the world, especially when spoken in admiration of one with a small handful of data centers and a small fraction of Verizon’s revenue. As for customers, a good chunk of Terremark’s revenue comes from the government sector, with which Verizon is already pretty well acquainted. More tellingly, McAdam said on today’s call, “I hope to move our data center controls over time to [Terremark CEO] Manny [Medina] because they do a super job of running data centers. That’ll make it more efficient for us…I think we’ll move some of our apps in there.”

That’s a somewhat striking admission. But it helps illustrate the disruptive force of the cloud computing model. By focusing squarely on this new model and specializing in it, this relatively small, young company has become, in many important ways, simply better at running data centers than Verizon, with its massive global footprint and customer base.  

As large enterprises are also learning, the new virtual architectures and business models presented by cloud computing are up-ending the value of lots of embedded assets, creating opportunity for relative upstarts like Terremark and Rackspace Hosting (RAX) (another likely acquisition target for telecom carriers).  I describe in NPRG’s latest report on data center services some of the advantages that standalone data center firms like Savvis (SVVS) and Rackspace have over telecom firms in the space – namely, that of undivided attention, which often results in standalone data centers being more efficient, updated with more current technologies and designs.

Another advantage standalone cloud providers tout is network neutrality, which brings up another interesting question about the deal that came up during today’s call: Under Verizon’s roof, will Terremark’s carrier-neutral colocation business (about 44% of its revenue) become more Verizon friendly? The company says neutrality will remain, as well it should. Customers may be wary of lock-in, so Verizon should do as some other carriers do, such as Level 3 Communications , and offer customers the choice of a cheaper bundled connection or a slightly more expensive independent one.

On this and other matters, Verizon is wise to give Terremark plenty of leash so that it can continue the practices that have made it successful so far. As McAdam said on the call, “We’re not going to try to cramp their style at all. They’re a free agent. They can support any partner they want to support.”