Where Does Rackspace Go From Here?

In the past week, the conversation around cloud computing has pulled the spotlight toward Rackspace (NYSE: RAX). Today alone, the stock is trading up 20%. So, why all attention in an otherwise mixed field of great innovators and steady stalwarts? A story in the Wall Street Journal suggests that Rackspace has hired Morgan Stanley to help evaluate options.

That story alone has generated a considerable amount of fodder on the blogosphere and Twitter streams. In addition, there was considerable chatter at this week’s OpenStack Summit in Atlanta.

Internal Competition

Rackspace’s historical ‘bread and butter’ comes from managed hosting and their legendary fanatical support. Then comes along cloud computing, Rackspace’s cloud offerings and a few acquisitions. The problem is that their traditional hosting services and cloud offerings could easily compete with each other. While some will quickly deny this point, the reality is that enterprises moving up the value chain will inevitably move from traditional managed hosting services to cloud offerings. The challenge is that the revenue and cost model for each is very different. In essence, the shift from managed services to cloud offerings will create a drop in revenue without further augmentation in either new customers or additional services.

The OpenStack Factor

Rackspace was an early, and significant, contributor to OpenStack. OpenStack is open source software that presents a strong contender for companies looking to build private and public clouds. In the past 6-12 months alone, OpenStack has received significant support from across the technology industry.

As an early supporter and major contributor to OpenStack, Rackspace got tagged as playing a heavy-handed role in controlling OpenStack’s development. Right or wrong, at the time there was a dearth of corporate leadership at the level Rackspace was playing. So, Rackspace pulled back and others quickly filled in. The question being posed is: Did Rackspace potentially pull back too far?

Today, the picture is quite a bit different. There are a number of major technology companies that have embraced OpenStack and are significant contributors. The question at the OpenStack Summit was whether OpenStack could benefit from a corporate leader helping drive the movement. If so, that could bring things full circle. The question is, with Rackspace’s deep bench of experience and involvement in OpenStack, could they be that leader?

Potential Suitors

Many have noted the potential suitors if Rackspace is contemplating sale. Brandon Butler of Network World mentioned some of the notables in his Cloud Chronicles post. Among those is a familiar cast of characters from technology’s elite.

So, what does all this really mean? Bottom Line: It’s anyone’s guess. But I have a theory.

The Private Advantage

I suspect one option may be to take the company private in order to provide some breathing room to retool. The shareholders of publicly traded companies are a fickle bunch. They’re looking for improvements in revenue and shareholder equity every single quarter. Miss a quarter and watch the stock price drop precipitously.

Sure, a company could make the necessary changes while flying as a publicly traded company. But that would require incremental change to minimize the impact to revenue. As such, it would be a slow and tedious dance in an otherwise dynamic and quickly changing industry. Not exactly a match made in heaven.

Going private would provide Rackspace some breathing room during a dip in revenue while the company retools to take advantage of the assets they have. During that time, they could realign their hosting and cloud businesses to take full advantage of their existing customer base while leading them through their maturing from traditional services to cloud.

Bottom Line

Time is not a kind mistress and I suspect Rackspace sees both the opportunity and the writing on the wall. However, the changes must come quickly as time is a constant and not redeemable.

Tim Crawford is ranked as one of the Top 100 Most Influential Chief Information Technology Officers (#4), Top 100 Most Social CIOs (#7), Top 20 People Most Retweeted by IT Leaders (#5) and Top 100 Cloud Experts and Influencers. Tim is a strategic CIO & advisor that works with large global enterprise organizations across a number of industries including financial services, healthcare, major airlines and high-tech. Tim’s work differentiates and catapults organizations in transformative ways through the use of technology as a strategic lever. Tim takes a provocative, but pragmatic approach to the intersection of business and technology. Tim is an internationally renowned CIO thought leader including Digital Transformation, Cloud Computing, Data Analytics and Internet of Things (IoT). Tim has served as CIO and other senior IT roles with global organizations such as Konica Minolta/ All Covered, Stanford University, Knight-Ridder, Philips Electronics and National Semiconductor. Tim is also the host of the CIO In The Know (CIOitk) podcast. CIOitk is a weekly podcast that interviews CIOs on the top issues facing CIOs today. Tim holds an MBA in International Business with Honors from Golden Gate University Ageno School of Business and a Bachelor of Science degree in Computer Information Systems from Golden Gate University.

13 comments on “Where Does Rackspace Go From Here?

  1. Anonymous

    interesting thought – here are 2 anecdotal points to support your view. 1. Rackspace cares about culture a lot. They will look at all large company suitors as a threat to their special culture. 2. Rackspace is bad at partnerships. Look at historical record of turmoil in channel group as well as lack of key strategic partnerships to embed/sell/distribute Openstack cloud products. They may be more inclined to go private and keep it in the family than be acquired by or partner with a bigger guy.

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    • You’re spot on that culture plays a huge role at Rackspace and has served them well over their tenure. It will be hard to find a suitor that can potentially take on the ‘fanatical support’ foundation they’ve built. The private route does seem best…but has its own challenges as well.

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  2. Well written Tim!

    Like

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