Life Is Getting Even Tougher for Rackspace

Google and Cisco just joined the army of price cutters in the IaaS market. With Amazon, Microsoft, and Oracle, they are aggressively competing in the market, so where does this leave Rackspace?

Mar 31, 2014 at 3:00PM

Life just got a bit harder for cloud computing services company Rackspace Hosting (NYSE:RAX). Google (NASDAQ:GOOGL) aggressively reduced prices across its range of cloud services recently, while deep-pocketed competitors like Amazon (NASDAQ:AMZN), Microsoft, and Oracle (NYSE:ORCL) are committed to offering infrastructure as a service, or IaaS, at highly competitive rates. In addition, Cisco Systems (NASDAQ:CSCO) is planning to invest heavily in offering IaaS. While much of this is known to investors, it's sometimes easy to lose site of the fundamental reasons why these companies are doing this and why competition is only going to get more intense.

Why companies are investing in IaaS
Simply put, it works. The companies that have transitioned to offering their services and applications on a software as a service, or SaaS, basis have seen a transformational improvement in their prospects. The three leading examples of this change are Adobe, Autodesk, and Intuit. Investing Fools already know how and why these companies are outperforming the markets.

It's not a coincidence. The evidence from these three companies is that offering SaaS-based solutions tends to improve the metrics that increase the lifetime value of a customer. In other words, retention ratios go up, marketing costs to keep or acquire a customer go down, and the opportunity to cross-sell solutions to customers is improved.

Of course, if it's working in terms of offering SaaS to customers, then companies will invest in more IaaS. Moreover, cloud-based infrastructure is also increasing operational efficiencies within companies. All told, corporate demand for IaaS is only going to increase in the future, and if companies need IaaS, they also need to run applications on platforms.

Move to the cloud or die
Inevitably, this means a company like Oracle is forced to invest heavily in offering IaaS because it needs to ensure that customers continue to use its applications and platforms. This isn't an optional extra for Oracle, it's an inevitable consequence of shifts in customer behavior. The company needs to respond to the challenges of pure cloud play companies like Workday and Salesforce.com.

As for Cisco Systems, it needs to offer IaaS to service providers and enterprise customers because, according to Cisco's president of development and sales, Rob Lloyd: "they want to rapidly deploy valuable enterprise-class cloud experiences for key customers – all while mitigating the risk of capital investment."

Cisco needs to do this because, if companies are shifting toward the cloud, it implies they are spending  less on the kind of hardware solutions that Cisco offers enterprises.

Turning to Google, its move to slash prices is seen as directly taking aim at Amazon Web Services' leading position in the market. If anyone thought that Amazon would take this lying down, then Amazon's announcement -- the day after Google outlined price cuts -- that it was cutting prices by 10%-65% should have served notice. According to a Reuters article, the cut marks the 42nd reduction since the company started.

What it means for the industry
Putting all of these factors together, it's clear that the these tech behemoths are committed to investing in offering IaaS. They are motivated by a combination of trying to penetrate new markets (Google), replace potential sales lost to customers (Cisco, Oracle), and offer other, higher-margin solutions to customers (Oracle, Microsoft, Cisco, Amazon, Google). Moreover, the success of companies shifting IT infrastructure and software offerings into the cloud will ensure rapid uptake of cloud computing in the future.

What it means to Rackspace investors
While all of this is great news for companies that want to invest in cloud-based infrastructure, it inevitably creates difficult market conditions for a company like Rackspace Hosting. Investing Fools have already seen how the company faces significant challenges in 2014, and the recent announcements by Cisco, Google, Amazon, and Oracle are only going to make things harder.

It's one thing to try to offer a differentiated service, but it's another thing to try to charge a premium for it when so many tech giants are aggressively cutting prices for IaaS.

The world's richest man is terrified of the cloud
There are few things that Bill Gates fears. Cloud computing is one of them. It's a radical shift in technology that has early investors getting filthy rich, and we want you to join them. That's why we are highlighting three companies that could make investors like you rich. You've likely only heard of one of them, so be sure to click here to watch this shocking video presentation!

Lee Samaha owns shares of Cisco Systems. The Motley Fool recommends Amazon.com, Cisco Systems, Google, and Rackspace Hosting. The Motley Fool owns shares of Amazon.com, Google, and Oracle.. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers