As we wrote in our earlier blog post, the Infrastructure-as-a–Service (IaaS) market may see some consolidation as pure-play IaaS vendors find the going tough because of increasing commoditization and competition.

Rackspace with Cloud revenues of over $300 million[1] is a key player in the IaaS space. Rackspace’s service and products include Customer Experience, Dedicated Cloud (managed hosting) and Public Cloud. The Public Cloudbusiness is growing rapidly and did about a third as much revenue as Dedicated Cloud in 2012[2].

While Rackspace have doing well as a business, they are faced with increasing challenges, such as:

  1. Rackspace is stuck in the commoditized IaaS segment and have not been able to penetrate the PaaS (platform as a service) and SaaS (software as a service) markets. This is despite their recent push into some specific platform areas (such as database, Big Data, Test & Development on cloud)
  2. Larger players like AWS and Google are aggressively dropping prices on their offerings, forcing Rackspace to do the same which could hurt margins and cash flow.
  3. Largely limited to the US market
  4. Convincing enterprises and SMBs to use its Open Source based OpenStack cloud services platform. Large enterprises would want to experiment with OpenStack (Ex; eBay/PayPal’s plan to shift to OpenStack directly,) rather than leveraging Rackspace services. On the other hand, SMBs are sceptical about open source via the cloud model.

Rackspace could be attractive to a potential buyer since it is a fundamentally strong company with significant strengths including:

  1. Consistently steady growth for the last 5 years (in revenues, profit margins, customers, infrastructure build-out).
  2. The company is recognized for its strong customer service, and its reputation among small businesses for ease of use is reflected in low churn rates (~1%).
  3. Strong SLAs
  4. It is second only to AWS in terms of market share.
  5. One of the early movers in the IaaS space
  6. Backed up years of experience as a managed hosting vendor, before they moved to cloud

Conclusion

The entry of large IT companies and telecom majors into the IaaS market has exposed the vulnerability of smaller pure play companies like Rackspace. The acquisition of three IaaS providers namely NaviSite, Terrmark and Savvis by telcos in the past two years proves that consolidation in the IaaS market is underway. Given the strengths of the company and threats it faces, Rackspace may be an attractive acquisition target.

[1] Source: Rackspace Shares Slide as Cloud Revenue Moderates, Data Centre Knowledge, Feb 13 2013

[2] Source: Rackspace sees solid cloud growth, but shares skid anyway, GigaOM, Feb 12 2013

By Ajith Sankaran/ Kiran  Nandavarapu/ Arjun Sampathkumar

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