Did Just Kill Rackspace?

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Rackspace Hosting (NYSE: RAX  ) has long counted on differentiating itself via superior service. Fanatical Support, the company calls it, sure that no one would be so crazy as to try and replicate its expensive commitment to customers.

So much for wishful thinking. (Nasdaq: AMZN  ) this week announced new support packages for its Amazon Web Services (AWS) customers that includes a free 24-hour customer service line for billing and account issues and technical support for "system health" issues, whatever that means.

But expanded basic support isn't the real worry. What is? Lower prices for top-tier support; Amazon has rebranded and reduced fees for its most expensive service levels. Now called "business" and "enterprise," the e-tailer will bill based on usage rather than a flat 10% fee as it has in years past.

Rackspace investors appear unnerved by the moves, especially now that NASA has announced plans to move some of its infrastructure from OpenStack -- a standard it helped to create -- to AWS. Rackspace is in the process of transitioning its internal infrastructure to OpenStack.

Amazon's aggressiveness coupled with NASA's flailing commitment to OpenStack has investors nervous; the stock is off about 7% in a week that's seen the S&P 500 rally more than 1.5%.

Is selling the right reaction? I don't think so. In fact, there's actually some good news if you read between the lines on the changes. Amazon in January introduced a service it calls "Trusted Advisor" for top AWS customers whereby consultants proactively recommend ways to save money, close security holes, and improve overall performance.

Today, only the top two of the four tiers of AWS support -- "business" and "enterprise" -- are granted access to the "Trusted Advisor" program. Not so at Rackspace. Fanatical Support means every account gets the sort of high-touch proactive service that only the most premium AWS customers receive today.

Or at least that's how I read the terms. If I'm wrong, we'll see Rackspace churn -- i.e., a measure of customer turnover -- rise as clients leave for AWS or AT&T (NYSE: T  ) or Microsoft (Nasdaq: MSFT  ) . Ma Bell and Mr. Softy have been cutting prices and hosting events in an effort to win customers to their respective platforms.

History says there won't be much impact. Rackspace has spent more than a decade fighting off intense competition. In the past five quarters alone -- as hosting has become more important with the rise of cloud computing -- churn has run negative as customers have stayed loyal. I expect they'll continue to.

Cloudy with a chance of millions
Though Amazon may not derail Rackspace anytime soon, our analysts still see it as one of three stocks that could help you to retire rich. Learn more in a free report that you can check out right now.

Fool contributor Tim Beyersis a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Rackspace Hosting at the time of publication. Check out Tim's Web home, portfolio holdings, and Foolish writings, or connect with him on Google+or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of and Microsoft. Motley Fool newsletter serviceshave recommended buying shares of Microsoft,, and Rackspace Hosting and creating a bull call spread position in Microsoft. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter services free for 30 days.

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  • Report this Comment On June 16, 2012, at 4:53 AM, gilsh wrote:

    I agree with the heading much more than the foolish bottom line. But much more than Amazon's killing anyone, it is NASA's decision. When such a dominant player makes a choice, everyone takes heed. Just like GE's anouncement of stopping to advertise in Facebook. This is a game changing move.

    And since when being able to survive for a decade means anything about the future ? Look at the formerly indomitable moats of Rimm and Nokia.

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