Will Rackspace's Unorthodox Approach Pay Off In Cloud Infrastructure

Rackspace has significantly lagged its peers in cloud infrastructure, but as the company makes changes and builds awareness for its services, can it compete with the likes of Amazon and Google?

Jul 21, 2014 at 6:30PM

Rackspace Holding (NYSE:RAX) is working hard to convince investors and its customers that it has an edge in the cloud infrastructure, or infrastructure as a service (laaS), business over the likes of Amazon.com (NASDAQ:AMZN) and Google (NASDAQ:MSFT). However, as buyout hopes fall apart, whether or not Rackspace is successful in laaS has never been more important for shareholders.

The state of cloud services
During Rackspace's last quarter, its cloud segment accounted for nearly 30% of total revenue. With growth of 34% year-over-year it has been the most significant fundamental driver for the company. However, with just $121.4 million in a cloud industry that created $3.5 billion in the first quarter, Rackspace's cloud business is still somewhat insignificant.

The current market leader, Amazon, generated more than $1 billion in first quarter revenue from cloud services, including growth in excess of 60 %. This means that Rackspace is lagging the industry leader in both market share and growth. With that said, Amazon is undoubtedly the king of cloud, with the business valued at $50 billion by Evercore . Yet, with the cloud industry generating $12.5 billion in trailing 12-month sales and growth of 50% annually, Amazon's peers have made major attempts to steal its market share.

This includes Google, who in March made price cuts of 30% in its cloud application platform and cuts from 68% to 85% in cloud storage services . While it earned less than $250 million during the last quarter from cloud services, Google's recent price cuts have made the company more competitive in an industry that is growing rapidly.

Albeit, Amazon must have felt threatened, as the company followed Google's footsteps with price cuts in excess of 30% for its own services . Essentially, this price cutting war has become a trademark of the cloud industry.

Rackspace tries and defends its unorthodox approach
Meanwhile, Rackspace has refused to follow suit with price cuts, and insists that added features make its services are worth significantly higher prices. In a recent article entitled Is A Rackspace Holding Acquisition Good For CenturyLink Shareholders an illustration of Rackspace's premium pricing in comparison to Amazon was shown: Rackspace charges $0.68 per hour for a 15GB cloud server versus $0.28 for Amazon.

This particular illustration apparently struck a chord with Rackspace President Taylor Rhodes, who wrote a blog in response to the comparison. Rhodes said that Rackspace customers get 24×7 access to cloud engineers, including specialists in a host of complex technologies such as data stores and digital marketing platforms. He added that Rackspace customers get architecture guidance, a security audit, and system monitoring and alerts — just to name a few value adds for a $0.40 premium to Amazon's cloud server per hour.

Then, on Tuesday Rackspace went one step further in distinguishing itself from cheaper peers by breaking its laaS offerings into two tiers: Managed Infrastructure and Managed Operations , with the latter being more personalized in offering all of the services that Rhodes mentioned in his blog. Furthermore, Rackspace is hoping to attract developers by providing a bundle of cloud services for free to all clients for 12 months.

Does Rackspace have a point?
Albeit, does Rackspace have a strategy that can make it relevant in an industry that has seen aggressive discounting among all of its leaders. To answer that question, we must agree that Rackspace's services are equivalent to its peers.

The Register's Jack Clark recently called Amazon's m3.xlarge server the (roughly) equivalent of Rackspace's "Performance" cloud server, and this includes sold state drive storage, or SSD, for both services. Moreover, Clark notes that Google's n1-standard-4 is also the near equivalent, although lacking SSD storage, and also sells for $0.28 per hour. Hence, the storage itself is equivalent, which means Rackspace's big bet is that developers will pay for the additional services.

Yet, with Amazon's Web Services as a whole growing at near double the 34% clip of Rackspace's cloud segment, it proves that clients have preferred the cheaper options in this space. While Rhodes makes good points in his blog, cloud servers are the sought service, everything else is a luxury, including architecture guidance and security audits.

Now, Rackspace's decision to offer a bundle of free cloud services to its clients is an interesting decision, one that developers might find appealing. However, Amazon already offers free services for its developers with the company's success coming mainly from its enormous presence with developers.

Not to mention, at Google's recent I/O conference it unveiled a number of debugging, monitoring, and tracing applications for developers, many of which are free. Hence, Rackspace's 12-month free bundle is a big step in the right direction, but not a breakthrough by any means.

Foolish Thoughts
With all things considered, Rackspace has made some changes, but its premium pricing strategy remains, and history serves as proof that developers and clients are more worried about the cloud services rather than additional features that may be more costly. Therefore, Rackspace has tried hard to find a fundamental difference between it and its peers' cloud business, but in reality, the biggest difference is price, and for this reason Rackspace will continue to be held back.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Google (A shares), Google (C shares), and Rackspace Hosting. The Motley Fool owns shares of Amazon.com, Google (A shares), Google (C shares), and Microsoft. 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