How Rackspace will stay alive in cloud: Stop competing with Amazon, start partnering

A behind-the-scenes look at how the managed services company went private and its new managed cloud offerings

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How would you characterize the state of enterprise adoption of OpenStack today? Do you feel it’s lived up to its potential or has it not made the inroads you expected?

It’s early days still. Think about how Linux really didn’t hit mainstream until 2005’ish and it was started 15-to-18 years before that. If you think of OpenStack being born in 2010, I think the pace of adoption of OpenStack is faster than we’ve seen in many open source projects. I also think there’s a realization that OpenStack is the leading private cloud alternative in the market, but we’re seeing progressive thinking about how the best way to use OpenStack is as a service, fully managed by experts.

What are a couple of things that will really accelerate the adoption of OpenStack?

Right now I think that the No.1 demand in the market is stability and reliability. Enterprises want to buy it with enterprise-grade SLAs and they want a point of view of where IaaS is going, particularly around containers. We have a lot of conversations with customers around Kubernetes and other emerging technologies, so customers want a clear and compelling vision of additional value above the IaaS layer. Today the currency is really around can you run it as a managed service in an enterprise-grade way for me? If so, let’s talk and let’s start going down the path on our POC.

Co-opetition with Amazon

I want to get back to your role as a consultant helping customers use public cloud. Amazon made an interesting announcement recently by launching AWS Managed Services, which is a product that helps enterprises use their public cloud. If I’m an enterprise customer, what advantage would I get from working with a third party like Rackspace as opposed to just working directly with Amazon?

The Amazon launch of Managed Services is a great validation of our thesis. We are past the early adopter phase and we’re onto Main Street. These customers need help. Main Street customers are services buyers. What Amazon launched is really a set of services that are targeted toward their Fortune 100 customers where they’re getting pressure to not introduce a third party. Those customers are going to demand that you do something for them.

This is a validation that we’re in mainstream adoption and the services element is critical to them continuing their growth rate in the core AWS business. The second thing is this is aimed at the very tiptop of the market. Third is this is a massive market that will be worth tens of billions of dollars over time so there will be no winner-take-all.

I think back to the challenge that we hear most often from CIOs, which is two things. One is I have a heterogeneous application portfolio so AWS is part of my solution but it’s not going to be everything; I need more than one choice. Second, these things are changing fast. Which things should I adopt as they are released and can you take on that risk for me and productize these things? That’s how we think about it. It’s no surprise that AWS is getting into the managed services market. Ultimately they are channel-enabling an ecosystem, but they’re going to have to do some things themselves for certain customer classes.

At Amazon’s re:Invent conference a couple weeks ago CEO Andy Jassy reportedly said that Amazon customers should work with partners who are all in on AWS. According to media reports, he said that consultants who work across multiple cloud providers cannot become experts in AWS. Do you think that gaining expertise in platforms other than AWS in any way hinders your ability to help customers use AWS to its full potential?

No. And interestingly, in Andy’s opening comments within the first two minutes of being onstage he recognized Rackspace by name as one of their leading at-scale expert managed services partners. He referenced specifically that we’ve attained now north of 600 certified AWS experts and that puts us in very rarefied air. If I’m Andy I’m going to say the same thing: I don’t want my MSPs working with anybody else either. But it’s always a co-opetition world and frankly, our value proposition is to match the heterogeneous nature of CIOs’ needs. We love AWS. We are actually rapidly becoming one of their largest partners and largest channels to market. I think they’ve recognized that. Recently they put us in their premier tier and you’ll continue to see a steady drumbeat of us working together.

+ ALSO ON NETWORK WORLD: Cloud computing showdown: Amazon vs. Rackspace (OpenStack) vs. Microsoft vs. Google +

Ultimately our customers want and need us to recognize that one size does not fit all in this world. AWS is a huge part of our expertise set and we’ll continue to dominate in AWS expertise. It’s what we do: We recognize tech inflections, just like in the past when Linux was the tech inflection we became the largest source of Linux talent. When VMware came along we became the largest source of VMware talent. We are now the largest service provider in those ecosystems and at this inflection we’ll simply become the largest in AWS.

It’s challenging for companies to be in that Infrastructure-as-a-Service market - there’s brutal price competition and that will more than likely continue to trend down over time. It seems to me that for companies that are in that market, the services become more and more valuable going forward, which makes it much more competitive with you going forward. Would you agree with that assessment?

I can’t remember a time in Rackspace’s history when there has not been fierce competition. If you go back to the early days we were a face in the crowd, a dot com web host. When the bubble burst we emerged as a top 10 and then over time we put a lot of other companies out of business. This is a competitive industry and any time there is money to be made there will be. It’s a huge market and we will do very well in our chosen customer segment.

Where Microsoft and Google stand

How much demand do you see from customers to use non-AWS public clouds such as Microsoft Azure or others?

AWS is by far the market leader and their numbers show that. Microsoft Azure is certainly rising in the market. Largely there are two sources of demand for Azure: One is the very large Microsoft install base that is already running their product set and the path of least resistance oftentimes is to develop applications for Azure. Microsoft is also starting to do better permeating new market opportunities. If you’re a CIO, part of your shop is .NET and grew up on Microsoft. Your CMO a few years ago started using AWS. You’ve got Oracle and SAP in your ERP. You’ve got a kind of Noah’s Ark, multiples of everything. Naturally, the evolution of the cloud market will leave room for Microsoft, probably Google. Clearly today AWS has the lion’s share.

What are your expectations regarding Google’s growth in this market? Do you think they will ultimately challenge AWS at that scale?

They certainly have ambitions, the financial resources and the talent to do it. The gap is big though. Will they ever actually overtake AWS or be a serious competitor? I think the latter is true. You can see the pattern emerging with Diane Greene as their CEO, who is really bringing more of what I would call an enterprise commercial model to what is a very good set of technology. It is early stage, but they are making more progress than the public market is aware of.

Is there anything we didn’t ask you about that you think is critical for people’s understanding of Rackspace?

The main thing for us is clearly to go private and what does going private enable you to do better? For us it simply is about really doubling down on our investment to add value to clouds. There is a proliferation of technology choices out there so the real scarcity in the market is no longer what Infrastructure-as-a-Service or platform am I going to use?

It’s really about which should I use in the best possible way for which workloads and who am I going to trust to run those in a securely and highly valuable manner for us? We are able now to take a much longer term view on that and invest accordingly when that is tough to do as a public company competing with Amazon. The second piece of news is the corollary there. We no longer compete against AWS or Azure. We are the completion of their offer for companies that want to consume those as part of a multi-cloud portfolio in a managed services form.

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Copyright © 2016 IDG Communications, Inc.

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