How Rackspace will stay alive in cloud: Stop competing with Amazon, start partnering

In August, 2016 months of speculations ended when Rackspace announced that an investment management group would purchase the 18-year-old company. Rumors have been swirling that the company may be acquired, but instead Rackspace took the route that Dell, Riverbed and BMC have and went private.

The company has its roots in managed services, but in 2010 it partnered with NASA to create the OpenStack cloud computing project. Rackspace used the open source code to build an IaaS public cloud competitor to market-leader Amazon Web Services.

Taylor Rhodes

In recent years, most notably with the ascension of former Chief Customer Officer Taylor Rhodes to CEO in 2014, the company has pivoted toward helping customers manage their next-generation IT needs. That includes no longer competing with AWS, but helping customers use it.

IDG Chief Content Officer John Gallant and Network World Senior Editor Brandon Butler sat down with Rhodes to discuss the company’s transition, its new corporate structure and the state of the cloud market.

Going private

I wanted to start off with the company’s new corporate structure. Earlier this year, Rackspace announced that a private equity firm with ties to Appollo Global Management had acquired it. What was the reason for that move and what should customers know about how that will impact the company?

It is a very simple reason that we went private and that is Apollo recognizes that we are early innings in a massive shift out of the corporate data center and that becoming the managed service leader in this shift out of the corporate data center into multi-cloud is a long game. We need to be able to invest and double down for the long game. It’s easier to do that as a privately held company then when you’re on the 90-day shot clock on the Wall Street earnings calendar. The message for customers is we’ve now been bought by an owner who is 100 percent aligned with our strategy to lead managed services in the cloud and we are willing to invest in our product and our service offerings for the long term to win that race.

Rackspace’s move to go private has taken place during a volatile time for the IT market. We saw Dell go private and then buy EMC. HP split up. Along with Rackspace, BMC and Riverbed also went private. In totality, what do these moves say about the state of the IT market?

AWS (Amazon Web Services) is a colossal disrupter. If you think back in the history of time, you see these seismic changes like the industrial revolution and the early days of mainframe computing and then the internet. I would put Amazon into that category of disruption. What I think you’ve seen over the last five years is an enormous disruption of the traditional tech model that was driven by perpetual software licenses and maintenance agreements and selling branded servers and making money off of maintenance agreements around those. All of that has been displaced and disrupted by superior technology options oftentimes at a lower cost point inside of the hyperscale public cloud stacks.

That has created enormous disruption to business models, to revenue streams, to valuations. Of course when those things happen it opens up the model for consolidation, for financial sponsors to step in and buy those assets and work on making them more valuable again. That’s what I think has happened. It’s very clear that in the early days that was a very disruptive force and now you’re seeing companies marshal themselves and have to reorient on their strategy and really answer the question of where you create value in an Amazon or a hyperscale cloud world. How does that change your business model?

I want to make sure that readers really understand what you mean when you talk about being a managed service provider because that’s a term that encompasses lots of different things. Can you outline exactly what that means for Rackspace?

First and foremost it is our conviction. The buying patterns in the market are that it is a multi-cloud world and so choice of infrastructure is critical. The first two buckets there are private cloud, or single tenant options, as well as public cloud options, and multiple of them. We offer management of AWS and Azure and we may add Google Cloud Platform in the future.

The first option that we discuss with CIOs is: Are you planning to outsource more over the next three years? More and more the answer to that is ‘Yes, I’m under pressure from the corporate boardroom on down to achieve lower cost and offer more nimble, agile and flexible IT models so I’m planning to outsource to cloud.’

The next conversation comes down to what is core to your business? Is having to hire, certify and engage AWS architects, Azure cloud engineers and experts in VMware and OpenStack core to your business, or do you find those skill sets harder to find, secure and retain? If those skills are important but they’re not making you more differentiated then you should be thinking about using a specialist who has thousands of people who can deliver these services at a better cost to you. Then you proceed into other critical elements like, cybersecurity.

We talk a lot to CIOs about who is best positioned to be your SOC, your security operations center. We get to aggregate a lot of knowledge and expertise and visibility across thousands of customers and build the combination software/hardware and services around cybersecurity at scale so that our customers don’t have to invest in all of that capability for themselves. We then get into the conversation around which workload is best for what type of an environment.

When you’re talking about your e-commerce and digital marketing assets it’s a different conversation compared to talking about your back office ERP systems. We’re able to match the workload with the best infrastructure solution and then wrap that in value-added services like managed security and deliver that as a fully managed service with SLAs that are clearly articulated and industry-leading. Those are the types of conversations that we have.

Does that mean that you’re targeting more of a midmarket to small market as opposed to larger enterprises, which probably have the resources to do those kinds of things?

Today, we serve over 60 percent of the Fortune 500, but we tend to be a specialist there. Instead of coming in to replace your entire IT estate, we tend to do business with companies, like TD Bank for instance, that are looking for a very deliberate private cloud strategy. Maybe they’re considering what’s next after VMware or they have chosen OpenStack as a platform and they’re looking for some help to build, operate and secure a private IaaS environment.

Don’t think of us as coming to convince you to do a big ITO (IT outsourcing). We’re specialists in particular areas for Fortune 500s who are trying to drive change and that change in their business model and their IT strategy. As you get further down into what I call Fortune 501, into the midmarket, we tend to be what I would call a broader solution provider. That’s where you find CIOs who feel an enormous pressure to decide whether to use AWS or Azure and figure out how to make that work with current systems. We tend to become a broader solution provider for that lower end enterprise and midmarket customer.

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Rackspace started off as a managed service company. The company has talked a lot about OpenStack cloud in recent years and now you’re helping customers use public clouds. What’s been behind these big pivots for the company?

We set out to be the greatest specialist in managing infrastructure and technology for our customers. In the early days that meant that we didn’t invent the Red Hat Enterprise Linux distribution; we didn’t invent the Windows operating system; we didn’t invent Oracle databases. What we did is we gave customers their choice of those technologies and then we ran them better and at a better cost than they could themselves.

Starting in 2008, we were early days in the public cloud. In fact, we launched our first public cloud in 2007, the same year that AWS did and then we made an acquisition of a company called SliceHost in 2008 and we began for the first time really becoming an OEM ourselves. We had to build a lot of the software that went into the early days of running public cloud and our own OpenStack public cloud IaaS became one of the world’s leading clouds.

The pivot for us fundamentally is realizing that being an OEM in a hyperscale business like public cloud infrastructure is just not a place that Rackspace ought to invest and compete. We are very, very happy now to be able to look at AWS and Azure and Google, who have an amazing ability to invest in public cloud IaaS and revert back to our original value proposition. If those clouds are the right solution for our customers, we will bring them into our portfolio of solutions.

We’ll operate and add value and connect those public clouds to customer environments running in their own data center or running on private clouds in our data centers. In a nutshell, we have been able to pivot away from being an IaaS competitor to AWS and Azure to being one of their largest and best at-scale MSPs (Managed Service Providers), which makes us a channel to market for them the way we’ve always been a channel to market for Microsoft or Red Hat or Oracle, etc.

What’s the breakdown of your business between traditional managed services and managed cloud?

Let’s clarify terms here: We think about our core value add as delivering services on top of infrastructure, whether that’s a dedicated bare metal environment, running VMware in a single tenant private cloud or we are managing AWS for you. Managed services is an umbrella term across any of those infrastructure options. Just over a year ago we launched our fanatical support for AWS offer. Every quarter we’re winning hundreds of new customers and today that is our fastest growing business. We’ve got our core business around private cloud and single tenant environments, and the bulk of the business today is clearly in our core. That’s been around a lot longer, but our fastest growing businesses are in managing third-party public clouds and cybersecurity.

If you were to talk to somebody a couple years ago about Rackspace’s competitors they would have said one answer, but given the company’s pivot who do you view as your primary competitors today?

We are in two Gartner Magic Quadrants, which is important for understanding our shift. In the Magic Quadrant for IaaS, AWS is far and away the leader and you see Azure moving up and Google as an emerging player. We sit right in the middle of that quadrant, which recognizes the fact that we are one of the few companies that has built an at-scale public cloud. But our focus here is not to compete with the hyperscale cloud provider, but rather complete their offer for customers who like that technology but don’t want to run it themselves.

When you then flip to the Managed Cloud Services Magic Quadrant, that includes teleco hosting providers like Verizon, CenturyLink or Colt, then you see technology conglomerates like IBM and HP and then there are specialists like us. In that quadrant we are top right by far as the recognized managed services leader. The only other specialist of consequence on there is really Datapipe. They offer a similar portfolio of services although at a much smaller scale. We believe we are very, very well competitively positioned versus Datapipe based on our scale and heritage. Having to build a public cloud at scale has given us a lot of very valuable skills and technology, whether those are DevOps skills or CI/CD (continuous integration/continuous delivery), really understanding how to advise customers, how to think about architecting and running cloud applications at scale.

When you think about our position versus telcos, we feel great; they’re not known for service or really known for being terribly cloud-relevant. When you think about specialists, we really are the largest global specialist in this space, and we have the experience in running a cloud to prove it.

Now that you’re a private company you can invest differently than a public company might. How will you take advantage of that in your future direction?

Because of our strong conviction that it’s a multi-cloud world and we don’t have to build all of the services inside the public clouds any longer, we get to focus on higher value-add software and tools. Recently, for instance, we announced a major improvement to our Compass product which we use to run AWS and Azure workloads for our customers. We announced a catalog of software-driven best practice architectures that allow our customers to consume AWS in line with best practices that drive down cost and improve security. Being able to do this on top of one cloud is a great advantage but we can do it across AWS, Azure and private clouds. We’ll focus our efforts on value-add on top of and around multiple clouds and continue to invest in the hard to find skills in the market that we can build at scale and sell those as a fractional service to our customers.

The state of OpenStack clouds

OpenStack is near and dear to Rackspace’s heart. The company co-founded the open-source cloud project in 2010. What is OpenStack’s role at Rackspace now? Is it less important now that you’ve become a consultant that helps companies use non-OpenStack based clouds like Amazon and Microsoft?

We believe the future of OpenStack is really enterprise private cloud. When we invented OpenStack and founded it our thought was that the world would want and need and value an open-source public cloud alternative to AWS at the time. That was the foundation and the root of OpenStack and it grew to be an early leading public cloud option.

As the market evolved, what we’re seeing is that the world is going to be perfectly happy with the three hyperscale public cloud options and it doesn’t need another one nor is there capital to invest and compete at scale with those three. There are many companies out there who are running current enterprise stacks, whether that’s VMware or Hyper-V as their “private cloud” and they’re looking and exploring lower cost and more flexible options for their private IaaS. OpenStack enters stage left as an alternative for companies who say: ‘Yes, I want private IaaS and yes, I’m looking for a lower cost, more cloud-like solution than my enterprise software stack running in the data center.’

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How would you characterize the state of enterprise adoption of OpenStack today? Do you feel it’s lived up to its potential or has it not made the inroads you expected?

It’s early days still. Think about how Linux really didn’t hit mainstream until 2005’ish and it was started 15-to-18 years before that. If you think of OpenStack being born in 2010, I think the pace of adoption of OpenStack is faster than we’ve seen in many open source projects. I also think there’s a realization that OpenStack is the leading private cloud alternative in the market, but we’re seeing progressive thinking about how the best way to use OpenStack is as a service, fully managed by experts.

What are a couple of things that will really accelerate the adoption of OpenStack?

Right now I think that the No.1 demand in the market is stability and reliability. Enterprises want to buy it with enterprise-grade SLAs and they want a point of view of where IaaS is going, particularly around containers. We have a lot of conversations with customers around Kubernetes and other emerging technologies, so customers want a clear and compelling vision of additional value above the IaaS layer. Today the currency is really around can you run it as a managed service in an enterprise-grade way for me? If so, let’s talk and let’s start going down the path on our POC.

Co-opetition with Amazon

I want to get back to your role as a consultant helping customers use public cloud. Amazon made an interesting announcement recently by launching AWS Managed Services, which is a product that helps enterprises use their public cloud. If I’m an enterprise customer, what advantage would I get from working with a third party like Rackspace as opposed to just working directly with Amazon?

The Amazon launch of Managed Services is a great validation of our thesis. We are past the early adopter phase and we’re onto Main Street. These customers need help. Main Street customers are services buyers. What Amazon launched is really a set of services that are targeted toward their Fortune 100 customers where they’re getting pressure to not introduce a third party. Those customers are going to demand that you do something for them.

This is a validation that we’re in mainstream adoption and the services element is critical to them continuing their growth rate in the core AWS business. The second thing is this is aimed at the very tiptop of the market. Third is this is a massive market that will be worth tens of billions of dollars over time so there will be no winner-take-all.

I think back to the challenge that we hear most often from CIOs, which is two things. One is I have a heterogeneous application portfolio so AWS is part of my solution but it’s not going to be everything; I need more than one choice. Second, these things are changing fast. Which things should I adopt as they are released and can you take on that risk for me and productize these things? That’s how we think about it. It’s no surprise that AWS is getting into the managed services market. Ultimately they are channel-enabling an ecosystem, but they’re going to have to do some things themselves for certain customer classes.

At Amazon’s re:Invent conference a couple weeks ago CEO Andy Jassy reportedly said that Amazon customers should work with partners who are all in on AWS. According to media reports, he said that consultants who work across multiple cloud providers cannot become experts in AWS. Do you think that gaining expertise in platforms other than AWS in any way hinders your ability to help customers use AWS to its full potential?

No. And interestingly, in Andy’s opening comments within the first two minutes of being onstage he recognized Rackspace by name as one of their leading at-scale expert managed services partners. He referenced specifically that we’ve attained now north of 600 certified AWS experts and that puts us in very rarefied air. If I’m Andy I’m going to say the same thing: I don’t want my MSPs working with anybody else either. But it’s always a co-opetition world and frankly, our value proposition is to match the heterogeneous nature of CIOs’ needs. We love AWS. We are actually rapidly becoming one of their largest partners and largest channels to market. I think they’ve recognized that. Recently they put us in their premier tier and you’ll continue to see a steady drumbeat of us working together.

+ ALSO ON NETWORK WORLD: Cloud computing showdown: Amazon vs. Rackspace (OpenStack) vs. Microsoft vs. Google +

Ultimately our customers want and need us to recognize that one size does not fit all in this world. AWS is a huge part of our expertise set and we’ll continue to dominate in AWS expertise. It’s what we do: We recognize tech inflections, just like in the past when Linux was the tech inflection we became the largest source of Linux talent. When VMware came along we became the largest source of VMware talent. We are now the largest service provider in those ecosystems and at this inflection we’ll simply become the largest in AWS.

It’s challenging for companies to be in that Infrastructure-as-a-Service market - there’s brutal price competition and that will more than likely continue to trend down over time. It seems to me that for companies that are in that market, the services become more and more valuable going forward, which makes it much more competitive with you going forward. Would you agree with that assessment?

I can’t remember a time in Rackspace’s history when there has not been fierce competition. If you go back to the early days we were a face in the crowd, a dot com web host. When the bubble burst we emerged as a top 10 and then over time we put a lot of other companies out of business. This is a competitive industry and any time there is money to be made there will be. It’s a huge market and we will do very well in our chosen customer segment.

Where Microsoft and Google stand

How much demand do you see from customers to use non-AWS public clouds such as Microsoft Azure or others?

AWS is by far the market leader and their numbers show that. Microsoft Azure is certainly rising in the market. Largely there are two sources of demand for Azure: One is the very large Microsoft install base that is already running their product set and the path of least resistance oftentimes is to develop applications for Azure. Microsoft is also starting to do better permeating new market opportunities. If you’re a CIO, part of your shop is .NET and grew up on Microsoft. Your CMO a few years ago started using AWS. You’ve got Oracle and SAP in your ERP. You’ve got a kind of Noah’s Ark, multiples of everything. Naturally, the evolution of the cloud market will leave room for Microsoft, probably Google. Clearly today AWS has the lion’s share.

What are your expectations regarding Google’s growth in this market? Do you think they will ultimately challenge AWS at that scale?

They certainly have ambitions, the financial resources and the talent to do it. The gap is big though. Will they ever actually overtake AWS or be a serious competitor? I think the latter is true. You can see the pattern emerging with Diane Greene as their CEO, who is really bringing more of what I would call an enterprise commercial model to what is a very good set of technology. It is early stage, but they are making more progress than the public market is aware of.

Is there anything we didn’t ask you about that you think is critical for people’s understanding of Rackspace?

The main thing for us is clearly to go private and what does going private enable you to do better? For us it simply is about really doubling down on our investment to add value to clouds. There is a proliferation of technology choices out there so the real scarcity in the market is no longer what Infrastructure-as-a-Service or platform am I going to use?

It’s really about which should I use in the best possible way for which workloads and who am I going to trust to run those in a securely and highly valuable manner for us? We are able now to take a much longer term view on that and invest accordingly when that is tough to do as a public company competing with Amazon. The second piece of news is the corollary there. We no longer compete against AWS or Azure. We are the completion of their offer for companies that want to consume those as part of a multi-cloud portfolio in a managed services form.