Rackspace CEO Taylor Rhodes is disarmingly honest about the ride the company has been on in recent years. This is what happens, he says, “when the world’s largest bookseller comes into your industry.”
It wasn’t Amazon’s bookselling ability that caused Rackspace headaches, of course, but its cloud computing division Amazon Web Services (AWS).
Rackspace started out as web hosting company, but morphed into one of the early cloud infrastructure players. However, just as it was becoming clear that the cloud would be an essential element in the tech landscape, the company found itself facing blistering competition from AWS — a big rival with very deep pockets thanks to Amazon’s retail business.
“They were much better equipped for that type of scale game than we were because they could fund it through their core business. They had set the expectation in the market for a long time that they weren’t about making profits — they were about reinvesting for growth,” said Rhodes of Amazon.
“We couldn’t sustain the innovation to be able to keep up,” he added.
Competing in a post-Amazon world
In May 2014 Rackspace revealed it had been approached by a number of companies looking to make an acquisition, but after months of deliberation the company decided to go it alone. The intention was to focus on its strategy of managing customers’ cloud implementations rather than continuing to build its own public cloud infrastructure, and focusing on customer support on other vendors’ clouds.
He explains: “Just think about how disruptive Amazon has been to the technology landscape…it’s phenomenal. How do you matter in a post-Amazon world? That’s what I think everyone has to figure out, and that’s what we’ve done.”
That meant building a business on top of AWS, Microsoft and Google rather than competing with them.
“When this started to become clear to us in 2014, we said: ‘We’ve got to go back and rethink, so what are we great at?’ We are great at taking other OEMs’ technologies and adding value through being able to monitor it, manage it, secure it,” said Rhodes.
Rhodes said there was a standing ovation from staff — known as ‘Rackers’ — when the decision to go private was announced. “The simple reason is that Amazon is a tornado…for us going private, the feedback we got from Rackers was that this is the right moment to do it.”
Being private gives Rackspace the opportunity to plan for the long term.
“It’s a horrible life playing to the 90-day shot-clock. It forces you to retrench in terms of your bets that you are willing to make”, said Rhodes. “The ability now to reset and have conversations not about earnings-per-share next quarter, but about how the company is going to be stronger in 2019 or 2020 is enormously refreshing.”
That doesn’t mean it’s all easy. The company recently announced a set of redundancies that affect about six percent of its staff globally.
“Ultimately now it’s about how are we going to build a stronger company. If we don’t have to go spend $300 million a year in capital competing against Amazon, building computing storage and networking, where should we go put that? In things like managed cybersecurity and professional services,” said Rhodes.
The Amazon effect
Carl Brooks, an analyst at 451 Research, sees Rackspace transitioning from a hosting and cloud infrastructure firm to a more general-purpose IT services provider. “Although the majority of its revenues still come from providing infrastructure to small and medium businesses, it’s seeing the best response and fastest revenue growth from its outreach to larger enterprises on multi-cloud and private cloud support and services,” said Brooks, who noted that Rackspace has to balance maintaining its stake in IT infrastructure and technologies like OpenStack, and catering to enterprise demand for “boots on the ground”.
Rhodes argues that the disruption faced by Rackspace is hardly unique.
“In every industry you’ve seen an uptick in private equity. The single common thread is the phenomena of cloud computing and the ability for every business — no matter what industry you’re in — to be disrupted with much more intensity and with lower barriers to entry, that’s been a common factor in a lot of the private equity moves…it’s the Amazon effect writ large.”
Rackspace is well placed for a big and growing market, said Rhodes: helping companies move their applications and data out of their own data centers and into the cloud — a long and complicated process.
“When you move to a public cloud, really what you’ve replaced is your data center, your servers and storage and networking, the software that makes all of that work. But what you haven’t replaced is IT operations management. Somebody still has to make sure that it’s working and monitored, somebody has to do capacity planning, understand what you are going to spend and what should you spend next, application architecture, security.”
The skills that Rackspace acquired when building its own public cloud business are very relevant to helping customers move their systems into the cloud, he says. “Early adoption is over; mainstream adoption is on,” said Rhodes, and mainstream companies tend to want to buy more support and services.
That’s because while cloud computing can create more flexibility, and maybe even save money for organizations, it’s fast-moving and complicated: Rhodes noted that AWS consists of 94 products which saw 1,100 changes and new features last year — impossible for the non-expert to keep up.
“That’s a big complexity factor — the pace of change in these things, the risk of deciding what to do, and then having to back that all the way into your application architecture, is a tough problem to solve for mainstream companies,” he says.
Rhodes that while revenue across the big cloud players is around $20bn, that’s still dwarfed by the $500bn of applications and data still held in data centers — and it could take a decade or more for all of that to move to the cloud.
“It’s super early days,” he said.
And what about OpenStack, the open-source cloud computing platform that Rackspace created with NASA?
“We thought the world wanted another alternative to public cloud,” said Rhodes. “What we are learning is the world doesn’t need another public cloud, so OpenStack is shifting form and going private cloud.”
His argument is that private clouds could be the next stage of cloud evolution for companies that are spending huge amounts on public cloud infrastructure. “We see a bit of evidence that when you get to that seven figures a month you start to examine whether that’s the most efficient economic model,” he said, arguing that some of those companies could see 20 to 30 percent savings by going to private cloud.
So will anyone attempt — like Rackspace did — to take on the cloud infrastructure giants of AWS, Microsoft Azure and Google?
Rhodes thinks it unlikely: “I don’t think the world is going to need another hyperscale public cloud. I think the availability of technology choice and quality is going to be there, and then you have to figure out who has the capital to compete with these hyperscalers and try to close the gap — and I just don’t see it happening.”