Rackspace Is Betting On The Wisdom Of 'Co-Opetition'

The past two years have been a roller coaster for cloud providers across the board, but few have seen more turns, dips and dark passages than Rackspace.

The cloud host out of San Antonio ascended to a peak on that seesaw ride earlier this month after delivering earnings that beat expectations and were generally well-received by the investor community. Those financials immediately -- and temporarily -- drove up the price of a stock that's lost half its value over half a year.

The better-than-expected earnings came at the end of a quarter that saw several bold and somewhat unprecedented business moves, most significantly partnerships with two of the company's greatest rivals.

[Related: 5 Ways Rackspace Is Transforming Its Business Through Cloud Partnerships]

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Those highly publicized deals to make Rackspace's "Fanatical" brand of technical support available for workloads running on Microsoft Azure and Amazon Web Services were interpreted by some as deft business pivots, and by others as Rackspace throwing in the towel on its own cloud.

But John Engates, CTO of Rackspace, told CRN that Rackspace is actually following a path it had long envisioned.

"This is very consistent with who Rackspace is and who Rackspace has always been," Engates said, "and probably was our strategy all along."

The AWS and Azure deals are too nascent to explain the uptick in quarterly sales. Those businesses will take time to scale -- they're expected to become significant revenue drivers in 2017, Rackspace CEO Taylor Rhodes said on the third-quarter earnings call.

Rhodes attributed the strong earnings to delayed enterprise deals bearing fruit and public cloud growth. But investors more likely were reacting to the CEO's first progress report on the partnerships when they sent Rackspace stock up several points immediately after the earnings call -- gains entirely lost in the following days.

"Whatever optimism the positive financial results generated, it affected the share price only briefly," observed Jeff Chandler, president of Fairfax, Va.-based American Technology Services, a Rackspace partner. "They are struggling to figure out whether they have a long-term future."

As Rackspace transitions both its messaging and its business model, partners are trying to read the tea leaves and get a sense of whether the strategy set in motion in recent months is actually paying off.

"Look, we're going through a transition as a business," Rhodes told investors on the earnings call. "We still see public cloud growth, but we see it falling compared to previous years, and look, that's a transition that the company has to go through."

The landmark deals with the world's two leading clouds are high-risk, high-reward propositions for Rackspace, most analysts and partners believe.

On the reward side, Rackspace can start selling a high-margin services product to a massive customer base -- AWS and Azure together control almost half the cloud infrastructure market.

But the risk is also very real.

Rackspace always emphasizes Fanatical Support as the prime differentiator for its own public cloud. What happens to that core hosting business when the service component that draws so many customers can be procured from competitors?

Ben Mead, cloud and infrastructure lead at Credera, a Dallas-based Rackspace partner, told CRN he believes those partnerships will drive revenue with only minimal risk of accelerating migrations to competitors and eroding the existing customer base.

What mitigates the risk, and makes the business pivot appear a shrewd decision, is the evolving nature of the cloud landscape and an emerging multicloud reality.

"Most savvy customers these days take a hybrid cloud approach where no single provider delivers all services, primarily to reduce risk associated with a single provider outage or disruption affecting continuity of business," Mead told CRN.

Molly Boddy, a research analyst with Technology Business Research, also told CRN the shift from managed hosting to managed services looks like it positions Rackspace well in the market.

"From our end, what we're seeing is public cloud is really a narrowing field with a couple big leaders, and there's good margin for services providers," Boddy said.

The multicloud environments that enterprises are adopting are creating a new "co-opetition thing," Boddy said.

"They are treating AWS and Azure as both partners and competitors. But in cloud, that’s not only increasingly common, but also probably necessary," Boddy told CRN. "It's bringing in new partners and customers that wouldn't consider them anyway."

Rackspace’s Engates told CRN that conversations he's had with CEOs and CIOs all over the world have convinced him the new norm for businesses is the pursuit of multicloud strategies.

"It's not just AWS or private cloud or Azure. They're not picking one and going all in. They're typically being pulled in multiple directions and that's because the demand comes from multiple parts of the business," Engates said. "Many business needs are driving a cloud strategy, but it's not always the same strategy."

Credera's Mead said the biggest value proposition Rackspace brings to the table are the tools and talent it has nurtured around supporting customers, allowing many to avoid retaining IT expertise in-house. The new partnerships should enhance the Fanatical Support brand in the marketplace over the coming years, he said.

And by avoiding the kind of infrastructure acquisition costs -- servers, licenses, real estate, leases -- that diluted its earnings results in the last quarter, "Rackspace can extend the support workforce, systems, processes, methods and tools to manage a significantly larger set of customers for limited additional investment," Mead told CRN.

"We go far beyond the support that's provided by other cloud providers. We go all the way to management. That's what managed hosting is," Engates said. "To really be on the hook for the success of an application."

That level of support involves ensuring an appropriate application environment with software, blueprints, best practices and experience in operation practices, he said. That's where Rackspace has developed much of its intellectual property over the years.

"It would be difficult to replicate a lot of what we did," Engates told CRN.

A few years ago the new managed services offerings wouldn't have been an easy sell because early cloud adopters were do-it-yourself types who didn't appreciate the need for them. But the market has matured and is ripe for that product, Engates told CRN.

"There's a big gap in the market we're capable of filling," he said.

And there are ways to mitigate the risk of losing customers by supporting rival clouds, he said.

Building strong relationships with those customers, helping them bridge clouds with well-designed architectures, and providing services that add value, especially around security, all help ensure existing Rackspace workloads stay in place, Engates said.

While the AWS and Azure deals drew the most attention, another partnership struck in the quarter with Intel sheds light on Rackspace's ambitions for its own cloud solutions.

The joint project with the chip-maker entails the creation of a new OpenStack Innovation Center -- an R&D facility to be housed at Rackspace's headquarters where the two companies expect to assemble an army of OpenStack developers.

On the earnings call, Rhodes told investors the Intel relationship "is focused squarely on further developing OpenStack-related product offerings and solutions, mainly around private clouds."

American Technology Services' Chandler told CRN there will for a long time be a place in the world for hybrid and private cloud solutions -- that's a big part of his own company's market position.

The question then becomes whether Rackspace can differentiate itself as the go-to hybrid and private cloud provider, he said.

"If not, they fall back to competing with hundreds of smaller, more nimble private hosting companies," Chandler said. "The world is definitely changing, and Rackspace is trying to put its best foot forward in the face of strong competition from AWS and Azure."

Rhodes told investors that "overall the most encouraging thing" about the majority of the vanguard Fanatical Support for AWS customers -- those who have signed up just in the first month -- is that they're new to Rackspace.

Other early joint engagements are coming from established Rackspace customers bringing incremental AWS workloads. "We couldn't support those workflows in the past, but now we can," Rhodes said.

"When compared to others in the AWS Managed Services ecosystem, Rackspace brings a global scale and heritage in cloud operations that none can match," Rhodes said. "We are well positioned to be the leader in this fast-growing market."

Cassandra Mooshian, also an analyst with Technology Business Research, told CRN that Rackspace, in the coming year, will need to figure out how to perform a somewhat complex balancing act as a cloud hosting provider and a services provider for Amazon and Microsoft.

But the upside is huge -- a new customer base that includes a high percentage of large enterprises, she said.

Rackspace's business might be a lot healthier with a smaller piece of a much larger overall pie, according to Mooshian.

The trend toward "co-opetition" is real, she said. Technology Business Research is seeing in its customer research increasing acceptance from enterprises of multivendor cloud environments.

"We see each of these platform and technology choices as an 'and' rather than an 'or'," Rhodes said on the earnings call. "More and more customers are using multiple cloud."

Rackspace has concluded those complex infrastructure environments are here to stay.

"It's not going to be purely one cloud or another," Engates said. "It's going to be all of the above."