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Gazing into the Rackspace Crystal Ball

Thu, 27th February 2014, 16:07

All is not well at Rackspace.

That much is certain, and frankly, it’s an understatement. CEO Lanham Napier’s untimely exit added injury to injury, and the depth of that injury is revealed by the markets: RAX took a dive to the tune of 18% after the announcement.

The loss of Napier comes at an awkward period for Rackspace, to say the least. After a relatively positive fourth quarter in 2013, the hosting giant showed signs of growth, necessary in the face of a long term decline. The retirement has undone that, and raised further questions about the stability and direction of a company beleaguered by the market and its competitors.

But what exactly has Rackspace on the ropes? We looked at this in an earlier article: the Cloud Hosting Price War, where we examined the impact of the juggernauts of hosting using their massive infrastructure to outcompete less… shall we say, financially deft companies. The writing was on the wall when Rackspace announced it wouldn't compete with the drastically lower prices, not because they couldn't, but rather because ‘lower prices don’t necessary mean lower costs’. Nice marketing judo, there.

And if the writing was on the wall then, the die is cast now. The departure of Napier leaves the company in the hands of new CEO/old CEO Graham Weston. Weston, as well as some analysts, focused on the positive growth of 2013, with higher revenue ($408.1 million, up 15.6%) if lower net income. The focus of all this doubt over growth is inevitably the divide between dedicated and public cloud options. Weston’s perspective is clear, “The future is dedicated,” he was quoted as saying, and so towards dedicated the ship sails.

Weston’s logic feels shaky. By the end of the quarter, Rackspace had 103,886 servers deployed, and was making $1,322 in monthly revenue per server – up just under one percent year-over-year. Certainly not a shady number by any metric and one that won’t go unnoticed by Rackspace’s salivating competitors. Anyone even remotely following the dedicated server market is well aware of the shakeup that has dedicated server prices plummeting to new lows.

The expanding market favors accessibility, despite any arguments of Rackspace’s PR department to the contrary, in the same way that consumers favor price, and not general notions of ‘ease of spending prediction’, as one marketer put it.

Indeed, the Rackspace strategy thus far has seemed to be something of a marketing blitz- with around $2m a year poured into a brand campaign. A shame, then, that their most public event in recent memory is the loss of Lanham Napier, who is remaining on for a few months as a consultant.

Time will tell the future of Rackspace, but things look dicey from here. It’s not merely that they've lost a CEO, it’s that they've for the time being failed to gain a new one. The direction of the past couple years has not been promising, and investors can’t be blamed for become somewhat uncomfortable without the assurance of innovation- now or in the near future.

In the cloud hosting market it’s not only AWS that Rackspace has to fear. Microsoft and Google are more than well-funded competitors, and the designs of other big names like Oracle and HP should prove troubling for Rackspace’s market share at a bare minimum. The list of well funded, established companies in the dedicated server market seeking a piece of Rackspace's meal ticket is notably longer. We’ll keep following this story as the year progresses.