Amazon is about to announce a deal that should terrify Microsoft

Microsoft Satya NadellaBusiness Insider/Julie BortMicrosoft CEO Satya Nadella gives a demonstration of Microsoft technology at Salesforce’s tech conference, Dreamforce 2015

Amazon’s huge tech conference for its cloud computing business is next week in Las Vegas, and the company is going to announce a partnership with Rackspace that will shock the industry.

It will also put Microsoft on notice.

The Wall Street Journal reports that Rackspace will partner with Amazon to help enterprise customers move their tech into Amazon’s cloud.

Rackspace had previously made a similar deal with Microsoft. So this new deal with Rackspace is a direct blow to Microsoft.

But it’s more than that

Amazon historically hasn’t been big on such partnerships. So this deal with Rackspace indicates how serious Amazon is about going after Microsoft’s prime market: enterprise business customers. It’s beefing up its customer support and its partner network to do that.

Amazon is the 800-pound gorilla of cloud computing: It’s got 29% market share, way ahead of everybody else (according to Synergy Research), and its Amazon Web Services (AWS) business is on track to book more than $US7 billion in revenue this year.

Amazon got there mostly by attracting internet startups, some of whom have gone on to become big companies, like Netflix and Airbnb.

In the early days, AWS wasn’t thought to be reliable enough for established businesses. This was one of the main selling points Amazon’s competitors, particularly Microsoft and IBM, used to grab keep lucrative business customers away from Amazon.

But as cloud computing has grown up and Amazon has radically built out its services, Amazon is no longer considered a scary cloud service. It is considered a top-notch provider.

Businesses like Yamaha of America are jumping on AWS with both feet, unplugging their computer servers, closing down their data centres and renting Amazon’s cloud instead. Yamaha is saving $US500,000 a year in the process, Vimal Thomas, vice president of Yamaha of America, recently told us.

Such a thing on AWS would have been unthinkable just a few short years ago. Microsoft wants to be the cloud computing service where established enterprises land — those are the customers responsible for the bulk of its revenue today, although they still buy mostly software to run on desktop PCs and servers. IBM has similar hopes.

And, at one point, so did Rackspace

Amazon and Rackspace used to be such fierce competitors in cloud computing that Rackspace spearheaded an a project called OpenStack to give itself and other IT vendors a chance to compete with Amazon.

OpenStack is a cloud operating system. An enterprise can install it in their own data center and then choose among many OpenStack cloud services, moving apps and data between them all, never being locked into to a single cloud provider. It was the anti-Amazon AWS.

OpenStack has been pretty successful, too, and is now being offered or supported by many big IT players like HP, Cisco, Red Hat. OpenStack has even given birth to a Unicorn startup, Mirantis (whose CEO boasted a year ago that “We’ve gone from signing about $US1 million in new business every month to $US1 million every week.”)

But he one company it didn’t save? Rackspace. It was getting creamed by Amazon and other competitors. In February, 2014, its CEO, Lanham Napier, left the company. Then there were rumours it would sell itself or take itself private.

Instead, Rackspace dedicated itself to offering higher quality (and more expensive) cloud computing, with great customer service, something that Amazon has a poor reputation for.

In July, it fired up a deal to become a Microsoft cloud reseller, helping companies move to Microsoft’s cloud, Azure.

And now, it will help its ultimate nemesis, Amazon Web Service, grab enterprise customers, too.

Amazon did not comment to the WSJ about the reported partnership, and has not yet responded to requests from Business Insider.

Disclosure: Jeff Bezos is an investor in Business Insider through hispersonal investment company Bezos Expeditions.

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