Editor’s note: Jillian Mirandi is a senior analyst with Technology Business Research.

HAMPTON, N.H. - Limited penetration, increasing competition and low margins in the public cloud market is driving Verizon to realign its cloud portfolio.

Verizon has shifted its strategy from public cloud to private cloud and hybrid IT with a professional services and networking layer. For Verizon, leveraging these historically strong assets and selling into its own multinational large customer base is a more strategic entry point than public cloud.

Although it will still offer public cloud, the most profitable aspect of cloud for Verizon will be in helping customers build clouds, enabling hybrid IT and allowing cloud partners such as Amazon Web Services (AWS) to leverage its private network. Like many larger IT vendors such as HP, Rackspace and Dell, Verizon realizes although it has the capacity and resources to offer public cloud, this segment is too low-margin and competitive, and will be dominated by fast-moving, developer-oriented and cost-cutting vendors AWS, Google and Microsoft.

Verizon has launched its cloud portfolio three times, making the most recent cloud architecture generally available in September. Given the recent relaunch and strategy shifts, TBR estimates Verizon’s cloud-driven revenue growth was 6% year-to-year in 3Q14, down from an average of 25% year-to-year over the trailing 12 months.

Public cloud IaaS generates an estimated 85% of Verizon’s cloud revenue, which will cause the vendor more pain in the short term as it de-emphasizes the public cloud portfolio. However, in the long run we believe Verizon is making the right moves by focusing on its strengths.

Verizon will connect with leading IaaS vendors to increase cloud credibility and meet customer demands for hybrid IT

Verizon is playing catch up in the cloud market as multiple launches of Verizon’s cloud portfolio have called into question its readiness and commitment to cloud. TBR believes Verizon will need to ensure customers of its commitment to the IaaS space and increase customer appeal to drive adoption of the Verizon Cloud.

The launch of Secure Cloud Interconnect service, which connects the Verizon Cloud with other clouds including Microsoft Azure and AWS, will help Verizon meet the increasing demand for hybrid IT and multivendor environments. Verizon’s 3Q14 partnerships with leading public cloud vendors AWS and Microsoft underscore Verizon’s movement out of the public cloud space.

We anticipate integrations with other leading IaaS vendors such as IBM SoftLayer and potentially Google in coming quarters.