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Tim Green

Rackspace Changes Its Course to the Cloud

by Tim Green | Dun & Bradstreet Editor

August 29, 2016 | No Comments »

What do you do when you get outmuscled by Amazon and Microsoft?

Rackspace, the San Antonio-based web hosting company caught in the wake of Amazon and Microsoft’s fast-growing cloud computing businesses, is taking the “if you can’t beat ‘em, join ‘em” approach.

The company, a pioneer in cloud computing, switched to reselling Amazon and Microsoft’s cloud services with additional management services that help customers use those clouds more efficiently and effectively.

Now Rackspace is taking something of a time-out to get its new model in shape. The company agreed late last week to sell to Apollo Equity and other investors for $4.3 billion, making Rackspace a private company.

Company officials said they wanted more flexibility in making investments and allocating resources to build out Rackspace’s managed cloud services business. The transition, they said, probably will have an impact on revenue and profit for some time. Rather than make investors suffer through quarters of challenging revenue growth, Rackspace decided to go private. The company’s stock is off some 60% from its high of $76 in 2013.

So far, Rackspace has sold several businesses that aren’t part of its new strategy, moved resources to support the scheme, and begun developing new products and services to carry out the plan. And the company is putting together a marketing campaign to let customers and potential customers know about its new offerings.

“As a private company, we expect that we will have the flexibility to strike more quickly and deeply on these fronts,” Taylor Rhodes, Rackspace president and CEO, wrote in a blog post on the company’s website.

Rackspace was an early provider of cloud computing systems that allow customers to rent as much server space as they need to run applications and store data. Cloud computing has grown quickly, boosted by the growth in mobile use.

Synergy Research Group reported that the cloud market hit $110 billion in 2015 and is expected to grow by 28% a year.

As the market has grown, so have the presences of Amazon, Microsoft, IBM, and Google.

Amazon Web Services (AWS) is the big leader in cloud, claiming 32% of the market on 53% growth from a year ago, according to a second-quarter 2016 report from Synergy Research Group. Microsoft’s Azure cloud unit is second, with about a 12% share and sporting 100% year-to-year growth, followed by IBM with about 8% market share and 47% growth, and Google at 5% market share and a growth rate of 162%.

Rackspace and other competitors were lumped in the “Next 20” category by Synergy with a group market share of about 28% and growth rate of 41%. Other companies in the group include AT&T, CenturyLink, Hewlett-Packard Enterprise, Oracle, and Salesforce.

Unlike those other companies, cloud computing wasn’t a sideline to other operations at Rackspace. It was THE business.

The four biggest providers are distinguished by their global presence, marketing muscle, ability to fund huge investments in hyperscale data centers, and, in most cases, a determination to succeed in the market, according to the Synergy analysis.

It’s not that Rackspace was losing money. On the contrary, its revenue doubled in the past four years to $2 billion in 2015 and its profit rose to $126 million. But the company and, importantly, investors didn’t see that Rackspace could keep up, let alone outrun the bigger companies.

So like other cloud companies Joyent, SoftLayer, and Savvis and software companies BMC, Tibco, and Compuware, Rackspace is seeking the haven of privacy to make changes.

The sale to Apollo is expected to close by the end of 2016.

Tim Green has covered business, technology and science at newspapers and in higher education. At Hoover’s he covers computers and telecommunications. Follow him on Twitter.


Photo by Scott Beale / Laughing Squid, used here under a Creative Commons license.

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