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Rackspace is a popular cloud computing and hosting company. Rackspace wants to save customers time, money and the headaches of managing their own IT infrastructure by letting their company do it.Rackspace says it has over 100,000 companies as clients, and that it works with 40 of the Fortune 100 companies. The company was founded in 1998 and went public in 2008. It’s based in San Antonio (where it has two data centres), but also has seven data centres elsewhere, both in the U.S. and abroad. Although most of its business comes from the US, a significant portion of revenue comes from international customers.
Photo: Data from Rackspace reports
Rackspace has two main segments of its business:
- Cloud computing: customers get virtual computers to run applications and store data, and they pay by usage.
- Managed hosting: customers are hosted on dedicated (physical) servers and can elect to receive various levels of support and other services.
Let’s look at each of these segments more in depth.
Flexible and scalable, cloud computing allows for running highly-customisable applications: a virtual server can be shut down, reconfigured, and relaunched in a matter of minutes. Rackspace has thousands of servers that are used collectively by all their cloud customers to run programs and virtual environments. Cloud computing can spread high usage over a large number of servers without any strain that might typically happen on a smaller network of in-house servers. (For more background information on cloud computing generally, read our explainer on cloud computing).
Through Rackspace, cloud customers can choose from a menu of services, including:
- Cloud servers: servers “on demand” that are linked together and share the networking and other hosting of multiple companies. Extra services, including storage, cost more.
- Cloud Files: customers store files and data online in the cloud, so that they are easily accessible from anywhere.
- Cloud Sites: hosting for websites.
- Cloud Load Balancers: ensures that no servers are overloaded or down.
Managed hosting is the more traditional business: instead of running on the “cloud”: customers have specific, dedicated servers in Rackspace’s facility. Dedicated resources often include networking, hardware and operating system software, all run by the host company. Managed products come with more support and structure and are sometimes slightly faster and more reliable than cloud products.
Customers can choose from managed products including:
- Private cloud service: Rackspace says this “virtualizes IT in a dedicated space”. In other words, a customer has their own physical servers but processes are virtualized across them, in a kind of “mini cloud.”
- Managed colocation: customers with managed colocation services handle most of their own software and processes, but Rackspace manages networking and dedicated physical servers.
Rackspace (along with many other hosting and cloud providers) also offers “hybrid” packages– meaning customers can choose some cloud hosting and some managed hosting.
So, what’s the business like?
Photo: Data from Rackspace reports
While Rackspace likes to focus its marketing on cloud computing, most of its revenue actually comes from the more traditional “managed hosting” business.“Despite the emergence of cloud computing,” the company wrote in its annual report last year, “we believe managed hosting will remain a key service offering as companies continue to demand dedicated equipment that will meet specific performance or security needs.”
That being said, the majority of Rackspace customers are cloud customers—not managed hosting. (It’s worth noting here that the company says they usually count customers by accounts—so one person or company could potentially have multiple accounts or both cloud and managed hosting accounts, driving up the number of reported “customers”).
Photo: Data from Rackspace reports
There are two things going on here that help explain this phenomenon. First, cloud customers generally are typically smaller businesses or individuals who either don’t need or can’t afford more sophisticated hosting options–so while there may be a lot of them, they typically aren’t using the bigger, more expensive services. Conversely, managed hosting customers are usually large companies with extensive infrastructure needs. So not only are they paying for the more expensive services, but often, they need more of those services.In summary, Rackspace is smartly embracing the disruption of its business. The traditional managed hosting business is the cash cow, and Rackspace is reinvesting the profits of that business into its newer, smaller, faster-growing cloud computing business.
How big is Rackspace’s opportunity?
Rackspace is well-positioned to be a major competitor in the hosting and cloud computing sectors. Their cloud and hosting services are well-established and wide-ranging.
Rackspace’s big competitor is Amazon, whose cloud computing business is big and far-ranging. Here’s how Rackspace hopes to differentiate itself:
- A focus on extensive, high-touch customer service. While Amazon’s cloud computing services are well-regarded, they come with little customer service. Rackspace touts its dedication to pleasing customers, highlighting its trademarked phrase “Fanatical Support” and rewarding employees who uphold their best service standards with a “straitjacket award.”
- Its managed services business, which allows it to have a broader portfolio than Amazon’s cloud-only services, which are not right for everyone, particularly businesses that want customised or hybrid (e.g. “private cloud”) solutions.
Rackspace also has lots of room to grow. The cloud market is huge and fast-growing, but even managed hosting is not nearly saturated, and the amount of companies needing those services will only continue to grow.
Rackspace has a diverse customer mix, ranging from one-man operations to Fortune 100 companies.
Rackspace also has amazing consumer loyalty (or lock-in): a significant portion of its growth comes from customers who add on more services or expand how much they use Rackspace, and it has a strikingly low churn rate of only around 1%.
Rackspace does have the task of convincing many businesses that cloud computing or hosting is useful and reliable. Both are still new enough concepts that some companies don’t see the benefits or don’t want to deal with the hassle of switching their IT services. (For that reason Rackspace may be more likely to appeal to younger or smaller companies without IT and networking services already deeply entrenched.)
THE BOTTOM LINE
It’s pretty clear that cloud computing is the future of IT management for many businesses, and Rackspace seems very well positioned to capitalise on that.
Rackspace has shown itself to be a leader in the field and has also shown its dedication to the development of cloud technologies. We think it has a bright future.
SEE ALSO: Cloud Computing, Explained →
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