Verizon Buys Terremark, and Rackspace Looks Even Better

Verizon announcing plans to buy Terremark for $1.4 billion is a big deal in the cloud computing world, but I don’t think Terremark will be the biggest winner as a result of the acquisition. Sure, Terremark gives Verizon an even larger global footprint, hundreds of millions in annual revenue and a relatively innovative cloud business that makes Verizon look a lot better against telco competitors such as AT&T, but the key word is relatively. There’s still a big difference between cloud innovation at the MSP level and that at the pure cloud level, and this deal just widens the gap between types of cloud providers. Both have their places and, now more than ever, Rackspace looks great as the company straddling the line between these two worlds.

Here’s what I mean. MSPs offering cloud services (e.g., Terremark, Savvis, SoftLayer, Peer1, Internap, etc.) offer valuable services for large businesses, but nobody is mistaking them for cloud-first, or pure-cloud, providers, pioneers, such as Amazon Web Services, Microsoft, GoGrid and Joyent. I wrote recently that Gartner got it wrong with its Magic Quadrant for Web Hosting and Cloud Infrastructure as a Service because the two really are two different beasts, and I stand by that position. MSPs have a variety of hosting options both dedicated and shared, enterprise-grade contracts, skin-in-the-game SLAs and general support that make them very appealing to large companies and governments that want to move workloads to the cloud, but their primary businesses are not cloud computing.

Terremark is a prime example of this. Its Enterprise Cloud offering has a number of notable customers, including from the U.S. government, but its vCloud-based self-service cloud is somewhat of a red-headed stepchild. From what I’ve heard, Terremark’s cloud business comes mostly from, and its energy goes mostly toward, the Enterprise Cloud, which relies on many of the enterprise-standard practices mentioned above. Overall, Terremark is predicting cloud revenues of $30 million for its fiscal year 2010 (which ended Dec. 31) out of total revenues predicted to be $350-$353 million. At best, that’s 8.5 percent of total revenue. Verizon buying Terremark is a case of a more-conservative company buying a pretty conservative company.

Cloud-first providers, on the other hand, generally don’t have dedicated infrastructure (one notable exception is GoGrid, which actually rents dedicated infrastructure just like shared cloud infrastructure) and focus their operations on providing a true self-service experience far removed from the traditional IT procurement cycle. Whatever they’re offering, it’s a cloud-first message, and it’s all cloud revenue, so all energy and innovative spirit are put toward cloud computing. This approach is more appealing to developers, and even smaller companies without strict regulatory compliance requirements, who want real change in how they buy and procure IT. Granted, it has a larger percentage of a smaller pie, but it’s estimated that Amazon Web Services revenues topped $500 million in 2010 – more than the entirety of Terremark’s revenue.

Right smack in the middle of both these camps lies Rackspace, which amassed $565.8 million in revenue during the first three quarters of 2010, of which 12.2 percent – $69.2 million – came from cloud computing. The latter number has been growing with each quarter and should only continue to rise as Rackspace furthers the integration between its stalwart managed hosting business and its cloud business, and when its much-ballyhooed OpenStack cloud-platform software becomes production-ready. At that point, many think Rackspace will be the largest in an ecosystem of cloud providers all running the same foundational software, which has developers very excited. One recent analysis already has Rackspace neck and neck with Amazon Web Services in terms of the number of top 500,000 web sites hosted.

Rackspace was among a number of MSPs whose stocks climbed on Friday after the Verizon-Terremark deal was announced on Thursday, and for good reason. Terremark is a relatively small player among MSPs. By contrast, Rackspace’s market cap is already at $4 billion, and it’s only going to keep earning more money from across its business lines because it caters to everyone from developers to large businesses. Competitors such as Savvis – another company possibly for sale now – presently do more total revenue than Rackspace – Savvis did $680.3 in total revenue during the first three quarters of 2010 – but managed hosting accounted for only 46 percent of third-quarter revenues, and cloud computing is just a part of that number. If Terremark ends being just the first domino to fall, and if cloud computing is the driver, Rackspace might be the biggest.

Related Research: Why New IaaS Providers Enter at Their Own Risk

Question of the week

How much consolidation do you foresee in this space?