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.