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As Cloud Pricing Tumbles, Rackspace Explores its Options

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Rackspace has long been the sweetheart of application developers and website owners. Its reputation for delivering “fanatical support” has made it an industry darling.

But what lives in the heart doesn’t always compute in the pocketbook, and that’s a problem when you’re a public cloud hosting company that competes against giants like Microsoft, Google and Amazon, among others. The aforementioned have cut prices and margins without getting hurt because of economies of scale.

Rackspace shares, on the other hand, have lost as much as 60 percent of their value in the past year. Needless to say, something has to improve, and it won’t likely be the price that the market is willing to pay for cloud hosting.

Seeking a Sweet Deal

This afternoon, Rackspace confirmed that it hired Morgan Stanley to help it explore its options, which means that it might be open to an acquisition or partnership deals. In a filing with the Security and Exchange Commission Rackspace wrote:

In recent months, Rackspace has been approached by multiple parties who have expressed interest in exploring a strategic relationship with Rackspace, ranging from partnership to acquisition.

"Our board decided to hire Morgan Stanley to evaluate the inbound strategic proposals and to explore other alternatives which could advance Rackspace’s long-term strategy."

The company stressed it and its board have made no decision, have no timetable and probably won't say much more about the matter until they have something to report.

A Hard Step to Take

This was, no doubt, a difficult step for Rackspace to take even as it finds itself in a race, a race to the bottom (pricewise), that it probably didn’t plan to compete in.

Earlier this week in a blog post the company pondered whether the true value of the cloud could be delivered by providers whose primary pitch is price. It’s like comparing someone who sells apples (the commodity providers) with someone who delivers warm, crisp apple pies.

For businesses that run on the cloud, the infrastructure is just one component required for success. And it’s often one of the smallest components in terms of the total costs that customers must pay. They also must have a team of specialists on hand to manage and operate that cloud at scale. That’s where the true cost of cloud comes in — and the true value…

"Commodity infrastructure is cheap and getting cheaper. It’s taking a path similar to the one we saw when servers became a commodity in the last era of computing…

"The difference is that cloud infrastructure only works when it’s delivered as a service. It’s not a physical product that you put in a box and ship. This difference has confused many cloud customers. They need to compare commodities wrapped in services rather than just the commodity infrastructure components themselves. Otherwise, they’re comparing apples to apple pies."

Finding a Bottom

The journey to the bargain basement cloud has, for most of us, yet to begin. It could be dangerous, have its casualties, and leave us helpless and homeless.

Let’s hope that Rackspace’s mission, vision, and strong track record for fanatical customer service remain regardless of whether it chooses a partner, stays intact or lands somewhere else.

Photo: DrewHorne, Shutterstock

 
 
 
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