Rackspace's cloud future in question

IT shops that rely on Rackspace cloud wonder what will come of the company, which is actively seeking new partnerships or a sale.

After years of industry consolidation, one of the last major independent cloud providers in the U.S. may follow...

suit. But it remains unclear just who has the resources and the need to acquire it.

Cloud and managed hosting provider Rackspace Inc. has been approached by multiple parties interested in either partnering with or acquiring it, the company said in a statement filed last week with the U.S. Securities and Exchange Commission (SEC). Morgan Stanley has been hired to evaluate these proposals and other options.

The sale of Rackspace would be the culmination of years of cloud providers being swallowed up by other vendors, according to Carl Brooks, analyst with 451 Research based in Boston."You see this sort of stuff marching up the chain to where these things provide additional value, and Rackspace hasn't been a part of that until now, possibly," Brooks said. "It marks kind of an apex of consolidation in the servers- and storage-as-a-service market."

The news is concerning for Rackspace cloud users, but  not that surprising, said Aaron Rankin, CTO of Sprout Social, a social media management startup based in Chicago.

Rackspace is ideally suited to help somebody compete against a behemoth
Robert MahowaldIDC analyst

Rackspace has always trailed Amazon Web Services (AWS) in acceleration and overall cloud product development, and now it has added competition from Google's cloud services.

"It' just feels like Rackspace doesn't have it in their DNA to be a good product company in that sense," said Rankin, who runs most of Sprout Social's business on Rackspace.

Sprout Social has used Rackspace for a number of years, and inertia has kept the company from another vendor.  Rankin said his willingness to continue with Rackspace will depend on what type of deal the company makes.

"If [Rackspace] is compromised or in jeopardy in any way, that's a big problem for us," he said.

Rackspace's successes, challenges

For years, Rackspace straddled the line between managed hosting and on-demand, hands-off automation, and it wasn't until last year that Rackspace had a fully integrated infrastructure platform up and running that matched the growth potential of AWS, Brooks said.

The company remains profitable, but it's had its share of struggles recently. CEO Lanham Napier retired suddenly in February following a year of slowing sales. And after peaking at more than $78 per share in January2013, the company's stock fell by more than half, even with a spike late last week following word of the SEC filling.

Rackspace's overall revenue grew 16% year-to-year to $421 million in the first quarter of 2014 according to an analysis by Hampton, N.H.-based Technology Business Research (TBR). Nearly 29% of that can be attributed to its public cloud business, but that is expected to decelerate over the next two quarters.

The Rackspace cloud is differentiated by its Fanatical Support managed services, according to Jillian Mirandi, a senior cloud analyst at TBR. But the company is getting squeezed at the top and the bottom through the lower prices of AWS, Google and Microsoft, and the robust professional services of IBM, HP and Accenture in the hybrid space.

"Rackspace is a great company that would make a very strategic business unit for a larger IT vendor looking to quickly expand their public and private cloud IaaS space, looking to hire on top-notch managed services professionals, support OpenStack and grow their cloud-enabling data center presence," Mirandi said.

Rackspace is more of a niche player in the cloud market, Mirandi said, but as a piece of a broader cloud strategy it could succeed. She sees the most likely acquirers being HP, Dell, AT&T or a provider such as CenturyLink looking for cloud growth. She said Google might also be a player as it gets serious about the enterprise.

Two of the company's six U.S.-based facilities are identified by Framingham, Mass.-based IDC as software-defined data centers that would benefit a larger vendor in the same way the acquisition of SoftLayer buoyed IBM last year.

"Rackspace is ideally suited to help somebody compete against a behemoth," said Robert Mahowald, an IDC analyst.

Operating as an infrastructure-only provider will become increasingly difficult, so this could also be a move by Rackspace to partner with someone else and expand its offerings, Mahowald said.

Purchasing Rackspace's cloud would inject the buyer with hundreds of thousands of servers and customers, with a fairly solid guarantee that it wouldn't be a loss leader for some time, Brooks said. But that still doesn't mean there's an appetite to buy out there.

"There's no sort of North American telecom that doesn't already have a Rackspace of its own," Brooks said.

Five years ago it would have been easy to come up with a list of potential buyers, he said, but it's difficult to guess which vendor is capable of spending billions on Rackspace while still having a serious lack of infrastructure services.

In its SEC filing Rackspace didn't provide a timeline for any decision and said it would provide no further specifics until a deal is reached. A Rackspace representative declined to comment for this story.

Trevor Jones is the news writer for SearchCloudComputing.com. Write to him at tjones@techtarget.com.

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