Industry Insight: AT&T’s Alliances with Microsoft and IBM/Red Hat – A Tale of Two Clouds?

July has been a watershed month for AT&T as it enters into two major “cloud deals”, one with Microsoft and another with the newly merged IBM and Red Hat. At first glance, the two deals seem oddly contradictory – a collision of proprietary Microsoft cloud (although about half of Azure workloads run on top of Linux) with open source cloud from the combined IBM and Red Hat. But why two cloud deals? What makes them different? What does it mean for the companies involved?

Two alliances to drive two kinds of transformation for AT&T

It is apparent that there is early confusion about the Microsoft partnership and the IBM partnership with AT&T, especially with the Microsoft deal that has been recently portrayed as a transaction valued at $2 billion (based on a claim by an anonymous source) over an unspecified period – a huge win for Microsoft. But, upon careful inspection of recent press releases by AT&T, Microsoft and IBM reveals that no dollar amounts have been officially disclosed by any of the three parties to date. In fact, it is clear that these two “cloud deals” are alliances with clear tit-for-tat exchanges of value that represent important ecosystem plays for AT&T as they reinvent themselves as a digital service provider.

So, what are the intent and nature of the Cloud alliances between AT&T and the two Cloud giants? What is clear is that the two agreements have very different objectives for advancing AT&T forward in the future of cloud in the era of 5G while providing a common platform for Microsoft and IBM to drive innovation for their respective service offerings on top of the next generation network courtesy of AT&T.

Microsoft + AT&T: Public Cloud First IT, sort of

AT&T Communication’s CEO, John Donovan, made it very clear – their alliance with Microsoft will involve the migration of “most” non-network systems and workloads to the public cloud by 2024, getting AT&T’s 260K+ person organization using Office 365 and upgrading endpoint devices such as laptops and desktops to Windows 10. This alliance agreement gives Microsoft a key vendor role in AT&T’s internal IT initiative to become a “public cloud first” organization, though it is arguable whether moving to Office 365 and Window 10 subscriptions constitutes a true public cloud transition. After all, you are still running Office and Windows on device, not in the cloud.

Regardless, a big win for Microsoft in moving AT&T from software licenses on device to SaaS subscriptions that include a sprinkle of bundled cloud-based collaboration services such as OneDrive, Teams, Exchange and a growing portfolio of online services. From the data center perspective, Microsoft has the opportunity to move AT&T off of legacy Windows server and SQL DB licenses onto a broader service-based revenue stream courtesy of Azure. What this win translates into in terms of number of subscriptions and annual recurring revenue will probably remain a confidential mystery known only by AT&T and Microsoft barring any further leaks and allegations by anonymous insiders.

Is this a big win against AWS? Not so fast.

It is important to note that Microsoft will be a preferred, not an exclusive, public cloud vendor of AT&T’s internal IT organization. A statement of exclusivity would have been a truly remarkable win for Microsoft, but AWS and other cloud vendors will likely have a future with AT&T as the broader multi-cloud trend plays out and enterprise IT organizations increasingly diversify their procurement of cloud services in order to avoid vendor lock-in and to capitalize on arbitrage opportunities in the fast evolving public cloud market.

Time will tell how big the Azure piece will actually be considering evolving public cloud economics as AT&T migrates workloads over time to the Azure cloud. As we have been asserting in our Future of Cloud research, the economics of cloud is not static, and 5G and Edge Computing are poised to shift the direction of computing once again over the next few years as deployments expand and mature.

IBM/Red Hat + AT&T: Cloud modernization and brokerage

Like the Microsoft “cloud deal”, the IBM collaboration with AT&T has an internal IT aspect focused on AT&T Business which is a subsidiary of the AT&T Communications division (which generates about 16 percent of AT&T’s total revenue based on its 2018 annual report) making it appear as the IBM deal is of lesser scale and significance than the Microsoft deal. However, AT&T Business’s agreement with IBM suggests a more interesting relationship and role for IBM in the context of AT&T’s internal IT transformation a.k.a. Public Cloud First Strategy.

According to Thaddeus Arroyo, CEO of AT&T Business, their collaboration with IBM will drive innovation in their core operational systems and drive the modernization of AT&T Business’s internal business applications that serve AT&T’s enterprise customers. Not only will IBM modernize these internal business apps, which is a potentially huge opportunity for IBM’s GBS, IBM will apparently help AT&T Business migrate the re-platformed applications to the IBM Cloud suggesting that Azure will not be the only cloud player in the future of AT&T’s internal IT. Furthermore, AT&T Business’s applications will be modernized and managed using Red Hat’s OpenStack and OpenShift platforms.

A very intriguing note in the AT&T press release is the mention of IBM as the key partner in managing AT&T Communications’s IT infrastructure. IBM looks poised to play a multi-cloud broker role while simultaneously deploying and managing AT&T Business’ hybrid cloud portfolio. Consider that AT&T Communications is AT&T’s largest business division which includes AT&T Business – a potentially huge deal for IBM and an enviable third-party role in AT&T’s overall IT transformation.

What do these alliances mean for AT&T? Market acceleration of 5G!

While the Microsoft-AT&T deal is being touted as a huge win for Microsoft in the race for public cloud superiority by everyone other than Microsoft, maybe the big winner here is AT&T. After all, operators all around the world continue to seek the “killer app” that is going to make 5G live up to its $12.3 trillion promise. Perhaps AT&T has not found the killer app but it seems to have found the killer ecosystem play in these alliances with Microsoft and IBM.

Both the IBM and Microsoft agreements include commitments to designate AT&T as a preferred communications service provider (CSP) for 5G network services and edge computing. This can be considered a significant boon for AT&T as it will be supporting both IBM and Microsoft – two of the largest IT software and services firms with combined 2018 revenues of slightly over $200 billion – in the development and delivery of innovative enterprise services and solutions that capitalize on the powerful capabilities (ultra-low latency, massive machine-to-machine communications, and enhanced mobile broadband) that the 5G network will eventually deliver as deployments expand and the technology matures.

However, there are some important differences between the IBM and Microsoft arrangements. According to the Microsoft press release, Microsoft will be collaborating with AT&T on developing and delivering new 5G-enabled solutions for mutual customers on AT&T’s domestic network, which implies customers in the U.S. AT&T’s 5G networks will enable Microsoft’s Edge Computing requirements needed to make new consumer applications such as their game streaming platform, xCloud, feasible. AT&T will also be collaborating with Microsoft in helping mutual enterprise customers develop new 5G-enabled business solutions.

AT&T Business, on the other hand, has a global footprint of customers in approximately 200 countries and has been IBM’s preferred provider of software-defined network services. With the newly-minted alliance, AT&T Business has an opportunity to work with IBM in developing next-generation digital business services based on emerging 5G, Edge Computing, hybrid/multi-cloud brokerage and Red Hat’s open source technologies and tools for IBM’s enterprise customers around the globe.

So, it seems that AT&T has established two deals that could drive the consumer and enterprise demand for 5G services while fostering the evolution of a robust Edge Computing network. The main question we have is what kind of innovation will occur as IT cloud (compute) meets CT cloud (network) especially as AT&T adopts container-based and serverless computing architectures for their software-defined network and evolves its 5G network?

Implications for Business and Technology Leaders

Both the IBM and Microsoft alliances with AT&T are important developments that should hypothetically advance all parties toward collectively becoming digital service providers that provide converged IT/CT services to consumers and enterprises. Business leaders in the communications sector should consider their own digital service provider play and ecosystem/partnership strategy to generate a positive economic tide for their 5G investments to ride on. In particular, determine if you are the ecosystem leader or just a participant. This decision could determine the place and fate of your company in the era of 5G.

For more insights on neXt Curve’s Converged IT/CT and 5G Evolution research theme, contact us for a detailed briefing with one of our analysts. Follow our site to get updates and notifications of our research and our 2019 research agenda.

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Leonard Lee

Managing Director, neXt Curve

July 19, 2019

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