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.”
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.
Rackspace Says It’s Not for Sale, Despite Obstacles
No doubt other vendors that have not been publicly disclosed also considered acquiring Rackspace but declined to do so. The race to the bottom in pricing against Amazon and Google apparently isn’t an attractive target on the public cloud side of the equation.
Rackspace isn’t just competing against Google and Amazon though; there are other cloud providers, including Verizon, Hewlett-Packard, IBM SoftLayer and DigitalOcean among a growing parade of vendors, all providing services that on the surface may seem somewhat similar.
The challenge is that in any acquisition consideration, management needs to make a “buy versus build” decision. That is, should the company buy the technology and services it needs to grow or attempt to build them on its own?
Rackspace is one of the founders of the open-source OpenStack cloud platform and uses OpenStack as the basis for its cloud offering. As an open-source effort, any vendor can choose to also take OpenStack and deploy it to build their own cloud. Certainly, Rackspace has an unmatched level of expertise when it comes to OpenStack, but perhaps that’s not enough to warrant a potential acquisition.
When Red Hat first got into OpenStack in 2012, I asked then CTO Brian Stevens why he didn’t just buy a company. He explained that it made more sense at the time for Red Hat to build out its own development team. I suppose that for some organizations in 2014 the same sentiment holds true, but not always (case in point is Cisco’s acquisition of Metacloud today).
Although Rackspace is the one of the founders of OpenStack (along with NASA), the OpenStack stack itself does not necessarily represent a competitive advantage in the market today, with multiple OpenStack-based solutions for customers to choose from. What differentiates Rackspace is its services and support for OpenStack. Putting a price on that is a difficult proposition.
Personally, I would have expected that Rackspace would have been taken private, and I have no doubt that was one of the considerations. As a private company, Rackspace would not have had the same demand to deliver strong quarterly growth as it does today. That said, when companies go private, there is often aggressive operational cost cutting and technology component sell-offs, as private investors seek to derive value.
In the final analysis, Rackspace has chosen to stay the course, remaining independent from another big IT vendor and staying publicly traded.
If Rackspace’s management continues its disciplined approach to not follow in the race to the bottom, to emphasize its OpenStack roots and to differentiate on support, I strongly suspect that the company has made the right decision.
Sean Michael Kerner is a senior editor at eWEEK and InternetNews.com. Follow him on Twitter @TechJournalist.