Cisco and Telstra: ideal cloud companions

Telstra and Cisco Systems have announced a first-of-its-kind alliance that signals an inflexion point in the evolution of the global infrastructure-as-a-service (IaaS) market. Even as Australia’s largest telco, Telstra has decided that the economies of scale required for sustainable success as an IaaS provider are beyond its means. Rather than invest in a potentially sub-scale home-tailored cloud computing infrastructure, Telstra has decided to partner with a global provider of ready-to-use cloud platforms.

The alliance is a win-win arrangement: Telstra has found a way to play a stronger local game in Australia by leveraging Cisco’s global cloud muscle, while Cisco has found a way to sell its global offerings into the Australian market without needing to invest in local services capabilities on the ground.

Scale is paramount

One of the most significant impacts of cloud services on the ICT market is the reinforcement of the dynamics of economies of scale. Cloud services that work well can grow fast, and faster, because all customers are consuming a standardised service offering. The largest service providers can aggregate the largest revenue and invest the most in infrastructure, software, and people. Economies of scale enable lower unit costs and therefore more competitive pricing, which fuels further investments in service innovation and trustworthiness.

Companies such as Amazon Web Services and Salesforce have defined this model, and proven that it works. The largest scale accrues from pure global public cloud services, but not all customers are happy to consume a global service.

Both real and imagined needs exist for data to remain more privately in the country where it is created and for cloud service providers to be locally based – particularly in government and other regulated sectors.

Customers also demand varying degrees of services: some are happy to buy raw virtual machines and storage while others require more management, security, and integration services. Such services are invariably more customized and easier to buy and provide locally based on “traditional” trusted service provider relationships.

Both local and global cloud services battles will be fought and won based on the interplay of global scale and ability to act locally. Global cloud players need cost-effective ways to act locally, while local services players need alliances with global cloud players to access economies of scale.

How big is big enough?

Telstra has been a big client of Cisco’s for decades. The relationship has deepened during the past few years as Telstra has used Cisco equipment to construct its own cloud computing infrastructure and network-attached storage (NAS) offerings – also partnering with EMC and VMware. In 2011, the telco committed over $800 million to build out its NAS portfolio, which also included its T-Suite software-as-a-service (SaaS) retail portal. This amount of investment would easily make Telstra the heavyweight of the Australian-based cloud services sector. But is it enough?

It seems not. Although Telstra reports strong growth in the uptake of its NAS offerings, re-engineering its legacy ICT environment and tooling up to be a world-class cloud service provider has evidently been hard work, and not without service delivery problems.

The company appears to have made an early decision to wave the white flag on DIY cloud computing infrastructure. Telstra announced that from late 2014, it will be leveraging Cisco’s global cloud platform to provide its NAS offerings and winding down its DIY cloud computing efforts.

This is a very interesting development for other players in the Australian IaaS market. If Telstra, the largest ICT company in Australia, thinks it isn’t big enough to create and sustain world-class DIY IaaS capabilities, then what company in Australia is?

It’s all about freeing up capacity for software and services… and Asia

The move is consistent with Telstra’s strategic directions, however – toward deeper services-based enterprise relationships, vertical industry solutions (with healthcare being a top priority), and Asia. Leveraging Cisco’s global cloud platform can hopefully reduce some of Telstra’s own cloud computing infrastructure burdens and free up management capacity to pursue value-adding SaaS solutions and ICT services offerings higher up the stack.

It also provides a global platform for Telstra’s growth into Asia, eliminating the need to construct cloud computing infrastructure in each country to meet data sovereignty requirements.

Indeed, with this move, Telstra is itself taking the cloud services medicine. As we often say, “cloudy is as cloudy does” – cloud services are defined by the fact that they already exist and are already proven to work. If Cisco’s global cloud platform is better, faster, less costly, and less risky (when all things are considered) than Telstra’s DIY efforts, then the logic of buying cloud services rather than building cloud computing assets is exactly the logic that Telstra expects its enterprise clients to adopt.

Steve Hodgkinson is a research director at analyst firm Ovum.