Diffusion: A New Model on the Cloud Catwalk

Prada did it with Miu Miu; Dolce & Gabbana with D&G
Now Verizon’s $1.4 billion purchase of Terremark applies a business model from the catwalk to cloud computing: The launch of a ‘diffusion’ line.
Diffusion lines - affordable merchandise from luxury labels – are big business in fashion.
Correctly marketed, they create a virtuous circle of demand between couture and main street buyers, and expand a designer’s overall revenues through direct sales and licensing deals.

Why Verizon might be smarter than you
The diffusion brand has got to be cool. And in operating Terremark as a standalone business, Verizon is gaining a cooler cloud brand than its own in certain customer segments and verticals.

In 2010, Verizon anointed Terremark as its partner for cloud services to notoriously fickle small and medium-sized businesses. Terremark can sell direct to SMBs, but also through the significant wholesale relationships it enjoys with other telcos, ISPs, integrators and IT services firms. They buy services including collocation, hosting, IT support and IP interconnect from the Miami-based firm.

Neither is this just a high-low play. Last year Verizon contracted 25,000 square feet of Terremark collocation space for its U.S. government clients because Terremark held the specific security certifications that they required. Today, almost a quarter of Terremark’s revenues come from the Feds – a segment already spending seriously on cloud services.

Why it’s still a gamble
The U.S. telco is paying a high price. Terremark’s revenues are just shy of $300 million, but only about 10 percent are cloud related, although growing fast. Terremark has generated a net loss for more than three years; and both firms carry heavy debts.

Against pure-play cloud providers like Amazon Web Services, CloudSigma and GoGrid or integrators like CSC, IBM and Logica, telecom operators like Verizon, Orange Business Services and SingTel are competing against vastly different opponents: As cloud first movers, pure-plays have won mass market recognition, while integrators have won trust for complex cloud migration services. Nor should IT vendors like Microsoft, datacenter operators like Rackspace and variations in between like Savvis be discounted.

The integrated telco should be king of the cloud
Yet owning CAPEX-draining datacenter and network assets – both fixed and mobile – should be a dream ensemble, particularly when married to sound security expertise.

But that’s logic speaking, not the street. And in a chaotic cloud marketplace, hedging a bet with a diffusion model is cannily fashion-forward.