Over the past few weeks, the IT news has been dominated by data center infrastructure vendors launching new products focused on simplifying data center operations. However, buying the latest and greatest switches isn't the only way to improve IT operations. Another approach could be to use a service provider and offload part or all of the operational tasks--that is, assuming the service provider has the required IT skills. The need to gain these skills is why we have seen so much M&A activity from network operators buying IT solution providers.
On October 28, NTT, Japan's national network service provider, acquired Denver-based Virtela Technology Services for a shade over $500 million. For those that don't know Virtela, the company was a pioneer in providing network-based IT services. Long before network virtualization, software defined networks, cloud computing and UCaaS were popular trends, Virtela was offering such services--we just didn't know them by these names.
I first started dealing with Virtela in 2001, shortly after I joined Yankee Group. I was writing a report on IP service switches and interviewed Virtela's SVP of operations and the main architect of the advanced Internet-based network, Ted Studwell. One of the founding principles of Virtela was that network service providers had to understand not just network processes, but IT processes, to provide customers with the high-quality service that has historically been absent from the telecom industry.
I had just begun my career as an analyst and had made the transition over from IT consultant. Coming from the IT space, I had a fairly low opinion of most network operators and had recently had one of my worst experiences with WorldCom, where it took me months to just convince them to take a look at one of my clients' network problems, even though the customer was paying an obscenely high monthly rate for a managed service. I was impressed enough with the high-touch, IT-oriented, Virtela service that I convinced the customer to move the network away from WorldCom to Virtela, and the rest, as they say was history.
The company's key differentiator is that the Virtela network isn't actually a network at all. Virtela built a massive overlay network that integrates literally thousands of local and regional network providers, giving its customers greater flexibility, geographic reach and network agility than going with any single network service provider. The local connectivity can be any combination of Ethernet, DSL, cable or wireless connectivity.
While customers could do this on their own, Virtela creates a single virtual network, composed of numerous physical networks, but offers customers a single SLA and bill. In addition to a single bill, this type of network offers highly consistent throughput, since they can just route around congestion, which makes it an ideal network for services such as voice and video. In fact, this is the reason why one of Virtela's first service offerings was a network-based video service.
In addition to the managed communication services, the company offers a broad range of IT-related products such as cloud computing, security, network analytics and application acceleration services.
For NTT, this acquisition gives them a strong network play in the US, a market the company has been trying to cultivate and build out for over a decade, since it bought Verio, back in 2000. Along with Virtela's IT service skills, NTT gets a little US muscle by inheriting a number of US-based global accounts such as Coke, Kodak, UPS, FedEx and Delta.
The acquisition of Virtela is well timed by NTT as well. CIOs are focusing on building greater IT agility, and I've always said that one can't really achieve true IT agility without network agility. This is one of the reasons why software defined networks has become one of the hottest trends over the past couple of years--SDNs, by definition, enable greater network flexibility. While many network operators are currently building SDN capabilities, the Virtela network was built with agility in mind, as it was part of the company's vision when it was founded. NTT now inherits these capabilities and can offer IT-related services in about 190 countries, up from the 160-country footprint it held prior to the acquisition.
This acquisition certainly looks like a win-win for both companies. The Virtela services are highly complementary to the ICT-related services that NTT currently offers, and NTT now should become a much stronger player in the US telecom market. For Virtela, the acquisition ends a 13-year run as an independent company but it's certainly validation that the vision the company had was the right one.
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