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Partners: Rackspace's Privatization Will Help The Cloud Pioneer Sort Out Strategic Challenges

Getting out from under the scrutiny of the public market should help Rackspace embrace its future as a managed service provider.

As Rackspace tries to find its bearings in the tumultuous cloud landscape with its move Friday to be taken private, analysts, partners and competitors seem to agree that stepping away from the intense scrutiny of Wall Street will be a blessing.


"It feels like they are searching for a place in the new world and can’t quite find it," said Jeff Chandler, president of American Technology Services, a longtime Rackspace partner based in Fairfax, Va. "With the move to go private, they will be able to sort out the strategic questions out of the glare of being a public company, just as Dell has done."

Confirming reports that surfaced earlier this month, San Antonio-based Rackspace said Friday that Apollo Global Management had reached a deal to purchase the colocation provider, cloud pioneer and multi-cloud managed services upstart and take it private. Investors, led by the private equity firm, will pay $4.3 billion once the deal is approved by regulators and Rackspace stockholders.


[Related: It's Official: Rackspace Going Private]


"This transaction will provide Rackspace with more flexibility to manage the business for long-term growth and enhance our product offerings," Graham Weston, chairman and co-founder of Rackspace, said in a statement.


Molly Boddy, a research analyst at Technology Business Research, wrote in an analysis of the deal that as Rackspace transitions to a business model increasingly reliant on providing managed services for former competitors Amazon Web Services and Microsoft Azure, privatization allows the company "to forge its own cloud services path forward."


The shifting business model has created uncertainty for those watching the company, Boddy noted, and not having to report to Wall Street will provide Rackspace with "the time and space it requires to further develop this services-centric cloud roadmap."

"They're trying on different shoes, and nothing seems to fit," said Jeff Aden, executive vice president of marketing and strategic development at 2nd Watch, a leading AWS managed services partner based in Seattle that competes with Rackspace. "Going private they're not going to have to report to The Street, so they can do things differently."

But respite from the scrutiny borne by any publically traded company could provide false comfort to Rackspace customers, Aden said, adding he wouldn't be surprised if ultimately the private equity acquisition will prove more beneficial to rival services providers in the Amazon ecosystem.


Despite Rackspace CEO Taylor Rhodes asserting in a recent earnings call that the company is "laser-focused" on becoming the largest AWS managed services provider, Aden expressed doubt that Rackspace's recently launched MSP practices—Fanatical Support for AWS and Fanatical Support for Microsoft Azure—would blossom under the roof of a private equity firm likely to make cutbacks.

"Apollo Group doesn't have a whole lot of technology companies. That indicates they will be cutting costs, which typically doesn't lead to a great customer experience," Aden said.


A pullback from the high-touch service Rackspace has traditionally been celebrated for could prove a boon to other partners in the AWS ecosystem, especially when considering the investments Rackspace made over the last year in training employees to attain public cloud competencies.

"If they don't see the return, they could be cutting costs. And that means employees trained there could be looking elsewhere," Aden told CRN, adding AWS expertise is highly sought in the channel.

But Mat Elis, CEO of Cloudability, a Portland, Oregon-based developer of tools to manage cloud costs, believes the acquisition is good news for Rackspace customers of all stripes.

"Many of their smaller to mid-tier customers aren't in a rush to get to the cloud or move to another vendor, and the larger and faster growing ones will be able to embrace that mix of managed services with a bit more confidence now the question of Rackspace's future has been settled in some way," Elis told CRN.

Rackspace has shifted its business model several times over its almost two-decade history.

After carving out a strong position as a traditional colocation provider, the company seized opportunities to become an early public cloud pioneer and played a pivotal role in development of the OpenStack cloud operating system that made a deep mark on the industry.

While Rackspace's OpenStack-based private cloud business—both hosted and on-premises—is still going strong, the public cloud market became punishing for the provider in the last few years.

In response to competition from hyper-scale powerhouses like Amazon, Microsoft, Google and IBM, Rackspace leveraged its services and technical support chops—previously applied exclusively to its own cloud offerings—to become a leading managed services providers for the industry’s two giants: AWS and Microsoft Azure.

Investors were pleased to see the far-greater margins reaped from managed services. But Rackspace still operates a substantial, if stagnant, hosting business—both dedicated and cloud.


"For current customers, they still provide a great service, and we have clients who love them," Chandler told CRN. "That doesn’t change by going private."

Those customers stay loyal to Rackspace because of the company's friendly, customer-service oriented approach and "tight processes" around support, he said.


For those reasons, "Rackspace has a place in the world. But it's hard to compete in the new world dominated by AWS and Azure," he said. And that's why American Technology Services has shifted all but those most-loyal Rackspace customers to Azure.


Aden said Rackspace is only one of the companies that played with the cloud model, only to fail in finding solid footing.


AT&T, Verizon and CenturyLink all made big cloud investments, but couldn't figure out a successful model to take on Amazon either, he said.

"Multiple companies like Rackspace came up with strategies and then abandoned them right away. Companies with traditional revenue line-items have struggled to figure out this new technology," Aden said.


Last year's pivot to multi-cloud managed services hasn't made Rackspace an important enterprise player, Aden told CRN. 2nd Watch almost never sees them in competition for deals with the largest AWS customers.
Aden said he expects some aggressive marketing around those Amazon and Microsoft offerings in the coming months, because Apollo doesn't want "everyone heading to the doors."


But the market will know within six to 12 months if Apollo is investing in the managed services business, or just aggressively trimming costs to maximize returns.

Elis, of Cloudability, told CRN he expects big changes inside of Rackspace once the deal closes. "I hope they are able to regain some of what made the company special in the early days," Elis said.
That quality that made Rackspace special, "someone to help you move onto the cloud without gouging you or messing up your business," Ellis said, "is needed more than ever now."

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