When it comes to cloud computing, Rackspace Hosting (NYSE:RAX) is betting that customers want more than just a place to store their data and applications. Everything is riding on the outcome.
Specifically, the company announced what it calls a "Managed Cloud" offering whereby Rackspace promises to give clients more service and expertise for their dollar than they would otherwise get managing a cloud computing infrastructure on their own.
"The cloud market is evolving. More customers are looking for a trusted partner with specialized expertise to help manage their cloud. Rackspace is ideally positioned to lead this managed cloud segment of the market," said Graham Weston, Rackspace co-founder and CEO in a press release announcing the strategy.
Why this is different
Think of it as akin to IBM's sales pitch. Of course, Big Blue will sell you servers and software, but the company's specialty is deploying a team of experts with the knowledge to use that technology to solve a business problem. Rackspace wants to help customers create useful, productive infrastructure in the cloud, and then collect the rent from hosting, managing, and maintaining those infrastructures.
Amazon.com (NASDAQ:AMZN), Google (NASDAQ:GOOGL)(NASDAQ:GOOG), and Microsoft all sell a lower-touch version of cloud hosting, and the battle to win customers has kicked off an ongoing price war. Rackspace stock has been caught in the crossfire more than once.
Rewind to December 2012. Google cut prices on cloud storage only to see Amazon respond by cutting prices on S3 by 25%. Google then responded with another 10% cut. Every quarter seems to bring another cut. But the fight doesn't end there; Amazon is also adding features. Just last week, the e-tailer launched Zocalo to give S3 clients a beefed-up option for storing documents and other files. The service also complements Amazon's WorkSpaces virtual desktop software.
Two levels, and one huge guarantee
Rackspace's response is to offer clients two distinct levels of Managed Cloud service:
Managed Infrastructure. Contains what Rackspace says are benefits that "far exceed" comparable services from competitors. Included is access to the company's Fanatical Support, which includes a variety of hands-on services, including security guidance, help with code, and round-the-clock access to specially trailed cloud engineers.
Managed Operations. Includes all the benefits of a Managed Infrastructure while adding a dedicated account manager and round-the-clock support, monitoring, and response. And if something goes wrong? Rackspace pledges to double the credit due for affected components, up to 100% of related fees paid during the month of the incident.
There's boldness in what Rackspace is proposing. Effectively, the company is guaranteeing that its experts can design and maintain a cloud infrastructure that's not only more productive but also cheaper to own.
We should have seen this coming
Weston and his team had to do something to contend with cut-rate competitors, and anyone who was paying attention had to know this is where we were headed. In May, company president Taylor Rhodes spoke of how Rackspace would have to rise above the noise created by the cloud price war.
"Ideally, we want to get the chance to engage in the conversation about [price and value] because when we do, we have a very high hit rate. The danger is if we don't get the chance to explain it, and that's where our mission in the market is -- to go out and really articulate our story," Rhodes said in an interview available at Motley Fool Rule Breakers. (Subscription required; get a free trial here.)
Now we know what that story is. Will it resonate? I think so, but we won't know for several quarters. My advice in the meantime is to look at how Rackspace reports its wins. Are deal sizes increasing? Is average revenue per server and per customer rising? If they are, it'll say a lot about the staying power of this business, and bode well for the future of Rackspace stock.
Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Apple, Google (A and C class), and Rackspace Hosting at the time of publication. Check out Tim's web home and portfolio holdings or connect with him on Google+, Tumblr, or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.
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