- Shares of managed cloud company Rackspace Hosting have been rallying since the announcement of a cloud partnership with AWS during Amazon's re:Invent Conference.
- This comes after Rackspace announced a similar cloud partnership with Microsoft's Azure in July.
- This could be the beginning of a major shift in the way the leading cloud vendors sell their cloud services and an exciting revenue opportunity for Rackspace.
Shares of managed cloud company Rackspace Hosting (NYSE:RAX) are up more than 8% after the company announced a partnership with leading public cloud Amazon Web Service at Amazon (NASDAQ:AMZN) re: Invent Conference being held from Oct. 6 till Oct. 9. Rackspace shares have been badly pummeled this year after the company delivered weak Q2 FY 2015 earnings and then lowered full-year revenue growth guidance from an earlier range of 14%-18% to a lower range of 12%-14%. Rackspace’s shares plummeted 21% after it announced second quarter results, and have continued to fall since. The shares are down 41.8% YTD.
Why AWS is a Big Deal for Rackspace
This is not the first time that Rackspace is partnering with a rival cloud vendor. Rackspace announced in July that it was teaming up with Microsoft (NASDAQ:MSFT) to provide managed support services for Office 365 through two platforms: Rackspace Managed Services for Office 365 and Fanatical Support Office 365. Through these support platforms, Office 365 customers can purchase multiple Office 365 services from Rackspace including tier-one support, cloud migration assistance, and premium managed Office 365 licenses. Through the deal, Rackspace became a reseller for Office 365 plans. Reselling Office 365 can be pretty lucrative for a large reseller, as evidenced by GoDaddy (NYSE:GDDY) which derives about 10% of its revenue from reselling Office 365 plans.
Video:Analysis Of Rackspace Microsoft Deal
The AWS deal will involve Rackspace bringing fanatical support to AWS. Why this new development is proving to be exciting to investors is because it represents a tectonic shift in the way the cloud will be consumed in the future. Amazon does not usually provide managed services for its cloud. Instead, it provides a huge ecosystem where various independent providers can provide their own suite of services within the larger AWS space. Prior to the Rackspace partnership, Microsoft only provided very limited support for Azure.
It’s interesting to note that AWS’s popular low-cost IaaS offering is part of the reason why Rackspace has been faring badly lately. The company was forced to exit the IaaS market due to intense competitive pressure from large clouds such as AWS and Azure. Rackspace entered the IaaS market back in 2011 when only AWS and GoGrid were considered true contenders in the space. Meanwhile, Azure had not matured to a level where it could compete effectively with the leaders. But once Azure joined the top dogs, then Google(NASDAQ:GOOG)(NASDAQ:GOOGL) and IBM (NYSE:IBM) piled on the pressure, the famous cloud pricing wars ensued. The deep-pocketed giants could easily afford to pump in huge amounts of money to build more competitive offerings, then cut prices to the bone. Rackspace was not as well-endowed and quickly found itself between a rock and hard place.
Rackspace realized it was unable to compete in the commodity unmanaged IaaS market and decided to get out and go back to its core competency as a managed cloud services provider. Through its trademark fanatical cloud support services, Rackspace provides managed cloud services by setting up, troubleshooting, and optimizing various cloud offerings for its customers.
Large cloud vendors such as AWS and Azure are now using managed cloud support services to encourage more enterprises to shift their workloads to the cloud, and also as a means to differentiate their cloud offerings. And judging by the speed by which AWS has joined Azure in the managed cloud approach, it’s probably only a matter of time before the other cloud vendors join the bandwagon.
Other than the new revenue opportunity that the new modus operandi offers for Rackspace, offering managed cloud services to the largest cloud vendors will allow the company to lure some of AWS and Azure customers to try out its own proprietary services. Either way it’s a win-win scenario or Rackspace.