How Rackspace Plans to Win the Cloud War

Learn what makes Rackspace hosting services so special in a challenging cloud market.

Feb 21, 2014 at 2:00PM

In the last month, shares of Rackspace Hosting (NYSE:RAX) have underperformed against other cloud-computing peers. The company took a beating after the news of the departure of co-founder and CEO Lanham Napier.

Napier, who joined Rackspace in 2000, took the company's top line from $1.5 million to $1.5 billion in 2013. Under his leadership, the company became a global leader in offering hosting services, from managed servers to hybrid cloud, with hundreds of thousands of customers using Rackspace for their IT needs.  However, the company now appears to be caught in the middle of a fierce fight for the promising cloud market, where giants such as Amazon.com (NASDAQ:AMZN) and Google (NASDAQ:GOOGL) continue investing heavily in technology to capture market share. In this difficult environment, how does Rackspace plan to continue increasing its top line?

Rackspace

Source: Rackspace Investor Relations

The cloud war
The company's biggest problem appears to be how it will fend off an increasing number of larger players competing for cloud customers. Amazon, which has more than 70 job openings in sales related to Amazon Web Services, is a strong competitor in the cloud-computing business. Its cloud-based hosting platform has become an indispensable tool for start-ups, thanks to Amazon's policy of giving one-year free trials to software developers. Google, which released its cloud platform early in 2013, is another must-watch. As the owner of the most popular search engine, the Internet giant's experience in mass infrastructure is unique.

A differentiated service
In a difficult business environment, the key to succeed relies in building strong competitive advantages. Rackspace is doing this by focusing on providing a differentiated hosting service and investing heavily in technology. For example, the company is actively supporting the development of OpenStack, one of the largest open, cloud-based systems for infrastructure as a service.

OpenStack
OpenStack is a free, open-source software that consists of a series of interrelated projects that control processing, storage, and networking resources throughout a data center, which can be managed through a convenient web-based dashboard.

Because OpenStack is free, open, and scalable, it has become quite popular within the cloud world. It can be used by both small and large organizations who are willing to reduce the risks of lock-in, usually associated with proprietary cloud platforms. As a result, OpenStack is used by several tech giants, including Dell, IBM, and Red Hat. Because Rackspace's private and public cloud software is powered by OpenStack, the company can offer customers a truly open platform, fast resolution times, and the possibility of installing a private cloud in less than an hour.

Note that Rackspace's emphasis on open technology has allowed the company to improve its top line, despite fierce competition from tech giants. In the latest quarter, revenue came in 15.6% higher than the year-ago period, reaching $408.1 million, and helping Rackspace to beat the Street consensus.

That being said, because Rackspace is relying on aggressive pricing models and heavy technology investments to increase the popularity of OpenStack, net income was down in 2013. Therefore, although Rackspace's public cloud-computing revenue increased significantly last year, the company also reported an $86.7 million net profit, well below the $105.4 million net profit achieved in 2012.

Final Foolish takeaway
The cloud industry is well-known for being highly competitive. However, Rackspace is improving its top line by offering cloud services based on a truly open software system, which allows companies to move their applications freely between providers. By doing this, Rackspace wants to become a sort of insurance against vendor lock-ins. Although shares took a strong beating after the departure of Napier was announced, Rackspace's cloud strategy seems to be working just fine, as the company continues increasing revenue despite facing a fierce business environment,

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Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Google, and Rackspace Hosting. The Motley Fool owns shares of Amazon.com and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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