Cloud giveth and cloud taketh away: Rackspace edition

Rackspace’s $4.3 billion acquisition by private equity firm Apollo Global Management is another example of cloud computing creating winners and losers

Cloud giveth and cloud taketh away: Rackspace edition

Hosting firm Rackspace has been a well-known name in the cloud industry for a long time, but lately the company has been struggling to keep up in the core cloud computing competition.

Instead, the firm has concentrated on becoming the “#1 managed cloud company,” mixing its own hosting services and cloud offerings while also cutting deals to provide “fanatical” service and support to users of market leaders like Amazon Web Services and Microsoft Azure.

It seems that strategy wasn’t enough, at least not by itself.

Even as AWS, Azure and Google Cloud Platform have been posting quarter after quarter of amazing growth that help cement their economies of scale, Rackspace’s stock stumbled, (the company had lost half of its market value before talk of a possible sale) which constrained its ability to find a better market position.

Rackspace’s $4.3 billion acquisition by private equity firm Apollo Global Management last week will instantly change that dynamic, but it’s not yet clear exactly to what end.

As a private company, observers note, Rackspace won’t have to worry about making its quarterly numbers in what could be a bumpy transition to a new role in the public cloud.

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Rackspace hasn’t precisely said what it plans to do under its new owners, but it dropped plenty of hints. In the press release announcing the deal, Graham Weston, co-founder and chairman of Rackspace, said that, “this transaction will provide Rackspace with more flexibility to manage the business for long-term growth and enhance our product offerings.”

It’s a multi-cloud world!

Significantly, Rackspace president and CEO Taylor Rhodes said that “We are presented with a significant opportunity today as mainstream companies move their computing out of corporate data centers and into multi-cloud models.” Then, in an accompanying blog post about the deal, Rhodes said the company wants “greater flexibility to invest our resources in additional multi-cloud capabilities that we expect to result in long-term growth. This transformation is likely to impact our revenue and margins for multiple quarters."

Taylor added that “we intend to more aggressively pursue the transformation that we’ve already begun at Rackspace,” and the company is also “developing more compelling offers to handle the many IT workloads that are moving out of corporate data centers but are not appropriate for the public cloud.”

Put it all together and the takeaways seem fairly obvious. Rackspace is still counting on the cloud, but appears to be betting that no one vendor will dominate, leaving an opening for a third party to help integrate, manage, service and support a variety of cloud offerings.

In that scenario, the deal would be designed to give Rackspace the runway it needs to make this new mix work. Will it work?

The cloud leaders will hope to keep as much of that work in house as they can, of course. If AWS maintains or extends its current dominance, it’s far from clear whether this market will be large enough to support a company of Rackspace’s size.

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The move was no doubt necessary for Rackspace, but it serves as yet another reminder of the ever-increasing clout of the public cloud, and specifically AWS—along with Microsoft and Google.

While they make big bucks in the fast-growing cloud market, it remains to be seen how much will be left for smaller players with alternative business models. At least partially shielded by its new status as a private company, Rackspace should have more time to find out.

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Copyright © 2016 IDG Communications, Inc.

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