How Rackspace Can Turn It Around

Rackspace reported their first quarter earnings Wednesday, and the market did not like what it reported.  At market close Thursday, the stock had suffered nearly a 25% loss.  At the same time, there was some good news in that revenue is up 20%.

Hollow Developers has always been a great fan of Rackspace, and we use their cloud server products as our failover systems.  However, we were forced to other cloud server providers for our everyday hosting needs primarily due to cost.  Amazon Web Services (AWS) has the hefty weight of Amazon behind it, allowing AWS to adopt Amazon’s aggressive pricing models, undercutting prices of competitors by a fairly substantial margin.  There has always been a premium cost to do business with Rackspace, and this premium is definitely worth it for their ‘fanatical’ customer service.  However, there are some businesses that cannot afford that premium, or don’t depend on the customer service enough in order to rationalize paying the premium.  In our case, interaction with customer service is so limited that a monthly premium doesn’t make sense.

So, how does Rackspace turn things around?

First, place benchmarks on their cloud servers instead of relying on third-party websites to compare their CPUs against Amazon’s.  In our experience, AWS virtual machines don’t have the CPU horsepower that some would expect.  If Rackspace doesn’t exceed Amazon’s performance for comparably priced servers, bump up virtual machine resources until they do.  This metric is the most important for many websites that rely heavily on dynamic pages, and can become a deciding factor in choosing one service over another.  It is not immediately apparent that Rackspace’s entry-level server actually outperforms Amazon’s closest alternative when comparing CPU and price.

Second, allow more administrative actions to be performed via the Rackspace control panel.  A Scalr-like setup for auto-scaling and easier cross-region deployments would be a huge value-add to the product.  With Scalr running $100/month, some basic built-in scaling could be a deciding factor in using Rackspace versus a competitor.  Alternatively, partner with Scalr to provide some sort of discount to the service.  Rackspace customers already receive discounts at a number of other websites, and placing a cheaper Scalr monthly cost on to the table may be a deciding factor for those wanting to grow their cloud footprint.

Finally, take a page out of Amazon’s book and add a free or nearly-free tier to Cloud Servers.  Allowing people to sample the product, even for a few months, would invariably lead to some people remaining on the platform instead of seeking out competitors.  Pairing this with a Scalr partnership would make Rackspace that much more attractive.

Surely, there are other things that Rackspace could do to regain the confidence of investors, but these seem to be the most important among small businesses with small but expanding cloud footprints like ours.

* Disclaimer – Hollow Developers is a small investor, customer, and former affiliate of Rackspace.

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