Editor’s note: Analysis: IBM recycles another telco cloud business, adding Verizon into the mix in a deal similar to one for AT&T in 2015. So why did Verizon sell and what does IBM gain? Technology Business Research Analyst Kelsey Mason takes a look.

HAMPTON, N.H. – Just one day after the sale of its Americas data centers to Equinix closed earlier this week, Verizon announced the sale of its cloud and managed hosting business to IBM. This sale finally removes Verizon from the cloud market that it has been effectively exiting since shuttering its public cloud compute services in April 2016.

Verizon has continued to deliver virtual private cloud and dedicated private cloud services over the last year, but will now transfer these assets and customers, as well as its managed hosting business to IBM. This transaction is similar to the one telco peer AT&T executed with IBM in December 2015.

After faltering when launching its IaaS, Verizon acquired its way into the cloud market in earnest in 2011 with the purchase of data center operator Terremark. At that time, Verizon had lofty ambitions to become a leading cloud provider, particularly within the public sector.

However, in the years following this acquisition, Verizon’s cloud strategy waivered and the vendor relaunched its cloud portfolio numerous times. Verizon was never able to make a true run at the public cloud space against leaders Amazon Web Serices and Microsoft before deemphasizing the business in 2014 and finally exiting the space in April 2016. Further, its narrowly focused base of government and healthcare clients was generally slower to move to cloud infrastructure than Verizon’s private cloud business could handle. In the last two years, Verizon diversified its cloud portfolio outside IaaS, investing in areas such as digital advertising with purchases of AOL and Yahoo), as well as Internet of Things (IoT) with acquisitions such as Skyward and Fleetmatics, creating further confusion around the fate of Verizon’s cloud business.

This deal with IBM finally clears up the uncertainty around Verizon’s cloud business that has loomed for years: Verizon has shifted from a cloud provider to a cloud enabler. Verizon’s planned exit from IaaS allows the vendor to focus on more strategic areas such as IoT, hybrid enablement and digital advertising that better utilize the vendor’s inherent strengths in networking, managed services and communications.

Verizon will continue to operate its America’s cloud business through the now-Equinix-owned data centers until the sale with IBM closes, which is expected in 2H17. Upon the close of the IBM deal, IBM will, at least in the near term, colocate with Equinix to continue serving Verizon’s current Americas IaaS customers, many of which are in the healthcare and public sectors. It is unclear whether IBM is purchasing Verizon’s EMEA and APAC cloud-enabled data centers, which were excluded from the Equinix deal, or whether IBM will colocate in Verizon-owned data centers outside the Americas.

TBR expects the latter is true as IBM is currently undergoing data center footprint expansion efforts while also updating the technology within its Bluemix data centers to better handle more cognitive workloads while Verizon plans to remain in the colocation services business. Verizon and IBM plan to work together on strategic initiatives that combine networking and cloud services, though specific details have not been shared.

IBM bails Verizon out of cloud while gaining an additional, complementary customer base

We believe IBM will be buying the businesses, not the facilities, from Verizon, i.e., Verizon’s remaining cloud “as a Service” and managed hosting equipment and customer bases. We expect IBM, over time, to transition the equipment it will be purchasing from Verizon inside of the Verizon-owned data centers in EMEA and APAC and the now 29 Equinix-owned data centers in the Americas from Verizon IaaS to IBM Bluemix IaaS. The immediate benefit, though, is gaining access to Verizon’s customer base, particularly in verticals where IBM is rapidly expanding its cognitive capabilities, like healthcare and financial services, and in harder-to-reach areas like the U.S. public sector.

This deal, once it closes, will help IBM more quickly reach a larger number of customers, from large enterprises down to SMBs, an area the company has been aggressively targeting with its own sales team for the past 18 to 24 months, particularly with its Bluemix portfolio. IBM reportedly struggled to meet its revenue and growth expectations with its CY1Q17 earnings, due in part to a select few large infrastructure-related client wins not yet closing. The more the company can diversify its customer base, the less this will show through its financial results and impact the market and Wall Street’s perception of the company.

As the market stands today, TBR believes IBM was the best-suited purchaser of Verizon’s cloud business. While Equinix could have bought the business along with Verizon’s data center assets, its strengths are more suited for being the backbone of cloud rather than the provider of it. With a government-concentrated customer base, Verizon’s cloud business would have been off limits to any foreign player such as Fujitsu or Alibaba trying to expand its reach into the U.S.

While strategically a purchase of Verizon’s cloud business would make sense for the newly formed DXC Technology (NYSE: DXC), which is comprised of the former CSC and HPE Enterprise Services, the company is much too new to have been able to pull off this acquisition. For the large public cloud providers — AWS, Microsoft and Google — Verizon’s focus on managed private cloud is too far outside of their core cloud strategies. IBM on the other hand, has the managed services business to support the current engagements Verizon has cultivated, and has prioritized healthcare and financial services as key industries to gain customer mindshare.

Compared to its peers in the managed services space, IBM lacks mindshare in the public sector and as such, Verizon’s core base of clients in this vertical provides IBM an inroad into this key customer base.

(C) TBR