Rackspace Cloud Business: A Closer Look

Rackspace is seeing growth in its cloud computing business at the same time the company’s traditional managed hosting operation acquires more of an up-market tone. But exactly how much has RackSpace's cloud grown? And where is it going next? Here's a look at the company's strategy.

Rackspace executives shared some strategic updates Monday during a Q3 earnings call. Here are some of the main points:

  • Rackspace generated $15.3 million in cloud business in Q3, a 17.5 percent increase over Q2 and a 138 percent lift compared with last year’s Q3.
  • Cloud now accounts for 10 percent of Rackspace’s total net revenue, up from 5 percent in Q3 2008, according to Bruce Knooihuizen, the company’s chief financial officer.
  • Managed hosting revenue for the quarter came in at $147.1 million, up 5.8 percent from the second quarter and a 11.5 percent increase over last year’s Q3.
Lanham Napier, Rackspace’s CEO and president, said the company aims to move up market in the managed hosting space, solving more complex IT needs. The cloud business, meanwhile, targets simpler, more dynamic workloads, he explained. Napier said the company is migrating single-server managed hosting customers to its cloud.

The company’s customer count suggests this movement. Between June 30 and September 30, Rackspace’s manage hosting customers declined from 19,363 to 19,328, while cloud customers rose from 51,440 to 61,616.

Overall, Napier said he sees a big opportunity on the enterprise side. He said Rackspace launched as an SMB-oriented company. While the company still caters to that segment, enterprise customers represent a bit less than half of the company’s business, he said.

Rackspace’s enterprise push has placed the company on a track to compete against traditional outsourcers such as IBM and HP. But Napier said Rackspace enjoys a business model advantage over those firms.

“We are cheaper and faster than they are,” he said, adding that Rackspace offers a degree of flexibility that traditional outsourcers can’t provide.

Rackspace’s enterprise rivals have a considerable size advantage. IBM had $103.6 billion in revenue last year, while HP’s sales are also north of the $100 billion mark. Rackspace had revenue of $531.9 million in 2008.

But market transitions have a way of favoring the smaller competitor -- at least in the initial stages. Companies such as Lante Corp. and Sapient Corp. possessed an early edge in the client/server transition of the early 1990s, focusing on that technology from the outset. The larger integrators, invested in the mainframe world, had to learn a new business. Lante enjoyed a decent run through the 1990s, but was a 2002 casualty of the dot-com debacle. Sapient, meanwhile, has soldiered on as a business and IT consultancy.

In the cloud computing transition, the inevitable shakeout has yet to materialize. Hosting providers such as Rackspace, Savvis and Terremark will all have a go at cloud survival.

Proper Perspective

In RackSpace's case, cloud revenue looks promising but it's only 10 percent of total revenue, up from 5 percent at this time last year. Napier credits Amazon Web Services for pioneering cloud computing, but Rackspace Cloud will be gunning for Amazon's Elastic Compute Cloud spot at the top of the heap going forward.

Lanham also said that while Rackspace "is not a custom shop," Rackspace's competitive edge is their trademarked "fanatical support," which helps match enterprise customers with the existing cloud solution that's best for them.

"The cloud is for everyone, but not for everything," Lanham said.

Also in the third quarter, Rackspace launched NoMoreServers.com, an online community meant to assist in moving hosted services to the cloud. Basically, Lanham says, SMBs should never need to buy another in-house server as long as Rackspace is willing to provide managed hosting.

And a closing thought: There's no word on how much revenue Rackspace lost this quarter in payouts due to the outages that have hit its data centers since the summer - the most recent occuring Tuesday of this week.

By John Moore and Matt Weinberger. Follow MSPmentor via RSS; Facebook; Identi.ca; and Twitter. And sign up for our Enewsletter; Webcasts and Resource Center. Plus, check out more MSP voices at www.MSPtweet.com.
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