While Microsoft (MSFT) and Alphabet's (GOOGL) Google have the scale and resources to fight the good fight against Amazon Web Services (AWS), more and more smaller cloud infrastructure (IaaS) players are realizing the deck is heavily stacked against them, and that they're better off partnering with the market leader for the sake of strengthening other businesses.
AT&T (T) is the latest sub-scale IaaS provider to face the music. The telecom giant announced today it's partnering with AWS to offer joint networking, Internet of Things (IoT) and security services to clients relying on both AT&T's telecom services and Amazon's (AMZN) public cloud offerings.
AT&T and Amazon's networking solutions are promised to deliver improved end-to-end network visibility that enables quicker and more automated decision-making. IoT devices connected to AT&T's networks will be preconfigured to "seamlessly and more securely send data" to the AWS IoT platform, which works with other AWS services to collect, process and analyze IoT data. And AT&T and AWS will share security threat intelligence to help companies detect and respond to threats.
The announcement comes a day after Fortune reported virtualization software leader VMware (VMW) will announce a partnership with AWS next Thursday that aims to make it easier to run VMware-based workloads on both their own infrastructures and Amazon's. The agreement would follow a February deal with IBM (IBM) to have IBM's SoftLayer public cloud unit workloads running on top of VMware's vSphere virtualization platform, which allows multiple "virtual machines" featuring a dedicated operating system and hardware resources to run on the same server (and moved between servers when necessary).
The AWS alliance would come in spite of the fact VMware has been facing off against Amazon for years through its vCloud Air platform. And that the company is controlled by Dell EMC, whose Virtustream unit (acquired by EMC for $1.2 billion in 2015) has its own IaaS offerings. Likewise, AT&T has offered its own IaaS services for years -- interestingly enough, with the help of VMware's cloud management software.
For AT&T, the reasoning behind an Amazon deal is simple: Telecom services still account for the lion's share of its enterprise revenue, and there's no point in taking away opportunities from a cash cow for the sake of protecting a smaller business that has been struggling to compete with the likes of Amazon.
For VMware, it's a little more complicated. The fact users of AWS and other top IaaS platforms typically rely on virtual machines that aren't based on vSphere -- AWS, for its part, relies on the open-source Xen virtualization platform -- is a big reason VMware's standalone vSphere sales are now declining, and could continue doing so for a while. That, in turn, is a reason VMware has tried hard to sell its massive vSphere base on adopting vCloud Air.
But with vCloud Air still just a niche player in cloud infrastructure, it looks as if the company feels it's better off actively supporting its clients' AWS use. Perhaps with the hope of convincing them to use vSphere on AWS and selling them on management software for running hybrid clouds that feature both public clouds and a company's own data centers.
Amazon, for its part, gets a valuable enterprise partner that helps it support hybrid cloud use in a way that it hasn't to date. Microsoft's Azure platform, aided by Microsoft's giant installed base of on-premise server software, currently has an edge on AWS when it comes to hybrid cloud support.
AT&T and (apparently) VMware aren't the only second-tier cloud names that now think it's in their interests to partner with leaders. Rackspace, about to be sold to private-equity firm Apollo Global (APO) , struck deals with Amazon and Microsoft last year to provide consulting and management services for their respective cloud platforms. And HP Enterprise (HPE) shuttered its Helion Public Cloud business, while simultaneously promising better software support for AWS. A Microsoft cloud deal was announced soon afterwards.
AWS is now on an $11 billion-plus annual revenue run rate, and Amazon, Microsoft and Google are collectively in a league of their own in the IaaS realm. As smaller rivals continue to face the music, the big three's sales will grow not only on account of the public cloud market's still-rapid growth, but also share gains against everyone else.
