Rackspace Says It's Not for Sale, Despite Obstacles

NEWS ANALYSIS: Rackspace names a new CEO, as the OpenStack cloud founder chooses not to sell after evaluating its strategic options.


Since May, cloud hosting vendor Rackspace has been evaluating whether or not the company should be sold. On Sept. 16, Rackspace announced that it had completed its evaluation and the plan is to remain on the current path as an independent company.

Rackspace has also named Taylor Rhodes as the company's CEO. Rhodes takes over for Graham Weston, who had been serving as Rackspace's interim CEO since February, when then-CEO Lanham Napier announced his retirement. Rhodes had been the company's president since January and has worked at Rackspace in a variety of roles since July 2007.

The challenge that Rackspace has been facing is nontrivial. As a publicly traded company, Rackspace reports its financial results on a quarterly basis, which places many demands on the company to grow rapidly. Although interest and demand for the cloud is growing overall, that doesn't always translate into a straight line of revenue and profit growth for cloud vendors.

The irony of the cloud market in which Rackspace is actively engaged is that while it's all about helping to lower capital expenditures and operational overhead for enterprises, it's actually a capital-intensive business for cloud operators.

Simply put, unlike real clouds, technology clouds are not water vapor-based; they actually require physical hardware.

For its fiscal 2013 year, Rackspace reported revenue of $1.5 billion and pointed the way toward more growth in 2014. For Rackspace's first fiscal quarter 2014, the company reported revenue of $421 million for a 16 percent year-over-year gain.

During Rackspace's first-quarter 2014 earnings call, Rhodes discussed the cloud pricing landscape and its competitive pressures. Over the course of 2014, both Amazon and Google have lowered pricing multiple times in a race to the bottom. It's a race that provides lower pricing for customers while reducing a cloud operator's profit margin.

"It simply says that they are intent on racing, and racing to the bottom in a very undifferentiated approach, which is to go try to compete primarily for developer-driven decisions with technology and low prices," Rhodes said at the time. "We will continue to emphasize the alternative that we provide and also that we have this firm conviction that the further they cut prices, it becomes very difficult for them to try to add more value or expertise on top, even if they want to."

Acquisition Options

The fact that Rackspace did not sell itself means that its management still has confidence in its business model. That said, Rackspace is in a very competitive market—and is not necessarily the most attractive target either.

A major IT vendor such as a Cisco might potentially have seen Rackspace as good acquisition target, though Cisco's management didn't see it that way. In May, Cisco CEO John Chambers reportedly said that he wasn't interested in acquiring Rackspace.

That doesn't mean that Cisco wasn't looking for potential OpenStack cloud acquisition targets. Today, Cisco announced the acquisition of OpenStack private cloud vendor Metacloud. Metacloud is somewhat different from Rackspace, though, in its focus. While Rackspace has both public and private OpenStack cloud offerings among its services, Metacloud is focused on private OpenStack as a service-based deployment.

Sean Michael Kerner

Sean Michael Kerner

Sean Michael Kerner is an Internet consultant, strategist, and contributor to several leading IT business web sites.