Rackspace's 'fanatical' army drops in on rival clouds

Rackspace is growing – just not fast enough for the Wall Street pack. Looks like it’s time to roll out the service troops to support rivals' clouds.

The firm’s stock was gang-battered on Monday, kicked brutally down the stairs by 13 per cent after management announced revenue growth of 14 per cent to $480m.

Not bad – but not good enough for investors in a sector where the multiples for SaaS and IaaS providers range between 30 to 50 per cent.

Worse – far, far worse – are its prospects for the future. Rackspace expects to grow between 1.5 and 2.5 per cent in the current, second quarter, which equates to revenues of between $487.4m and $492m.

That’s not growth by cloud standards; that’s growth by the standards of Oracle and SAP, dated giants in the field of on-prem fighting to transition online.

Compare Raskspace to the on-steroids growth of AWS; it's tiny compared to Amazon but leader of the cloud pack – up 49 per cent to $1.57bn at last count.

Clearly, AWS/Amazon and Rackspace are in different categories on cloud. Rackspace is older, having been founded in 1998, while AWS popped into life in 2006. They come from different starting points; the former bills itself as offering “fanatical” levels of customer support. The latter is a provider of elastic computing whose idea of customer support amounts to: here’s our tin, now do it yourself. Nevertheless, AWS upended everybody.

Rackspace tried to regain the field by jointly leading OpenStack in 2010. Since then, however, the benefits of OpenStack have flowed to others: that is, consultants gluing the haystack together and customers eschewing public clouds for private. Neither discernibly helps Rackspace.

Part of the secret of AWS’s growth has been its pricing – offering low up-front costs and promising to keep cutting prices, scooping up customers, in part, on price. Microsoft has joined battle with AWS on price, trying to match it.

It’s a price race that Rackspace has declined to enter. Rackspace is trying to push a quality argument, saying it offers more than simple commodity infrastructure – and therefore it won’t be caught on price. It claims to offer a manage cloud that AWS is lacking while it’s conceded to power users by providing dedicated, single-tenant machines under OnMetal. The firm even appointed a new CEO in September last year, signalling a break with the recent uncertainty on being sold and as an independence and growth statement.

But, if you aren’t going to concede on price in this particular war, you’re cutting yourself out of the volume of culture that’s becoming the ingredient of AWS’s growth.

Rackspace does have another one last option – and, no, it’s not rolling out more tin or, apparently, conceding on price. Rather, it’s people and processes in an area Rackspace reckons it’s “fanatical” in – support.

CEO Taylor Rhodes said on Monday that supporting other companies’ clouds is Rackspace's priority rather than trying to catch the giants in the server roll-out game.

The opportunity is to “go leverage someone else’s product expertise and capital, and really differentiate on what makes us a specialist in our market.”

Rackspace announced “fanatical support” for Microsoft’s Office 365 and Rackspace Managed Services for Office 365 last week. The former is tier-one support for Office 365, Exchange migration, consulting, architecture and tuning. Managed Service offers this plus on-demand advice with a dedicated account team.

This is the new black.

Rhodes also claimed to have had “conversations” with unnamed potential partners, saying his firm aimed to build a service model to serve “one or more of the largest providers.”

“Assume that the launch of Office 365… is a good sign, in terms of our intent down these paths,” Rhodes said.

The question is can Rackspace, in tethering this emerging support business to the cheapo engines of others, profit the way Wall Street wants. Judging by the hammering Rhodes' company's stock took on Monday, the initial answer is "no."®