Rackspace is the Dr. Jekyll of hosting. For the last few years, it has been a legacy managed hosting provider by day that dabbled in cloud computing at night. But as happened to Dr. Jekyll, Rackspace’s transformation has reached the point of no return.
In its past two quarters, Rackspace has derived more than 20 percent of its revenue from the “public cloud.” In its first-quarter results released on Monday afternoon, Rackspace reported cloud revenues of greater than 21 percent of its overall revenue (about $64.7 million of public cloud revenue out of just more than $301.3 million overall). Its cloud revenue was a 74 percent increase over last year, while “dedicated cloud” (read “managed hosting”) revenue grew just 22 percent.
Rackspace is becoming Mr. Hyde for good.
Whether that’s good or bad might depend on who you ask. Investors certainly weren’t happy with its missed profit mark in the first quarter, and shares tumbled in after-hours trading. But maybe they’re just thinking about the short term.
An optimist would note that Rackspace has been undergoing a lot of change lately, putting the finishing touches on its public-facing OpenStack-based cloud infrastructure. Assuming the OpenStack software — the result of an open source cloud computing project that Rackspace founded and still spearheads — really is superior to anything out there, and assuming the OpenStack ecosystem takes off as planned, Rackspace should have much brighter days ahead.
Truly, though, it’s tough to say. Even Amazon Web Services (s amzn), the undisputed king of cloud computing, has analysts scratching their heads. The business is booming, but signs that it’s operating on a cost-plus pricing model mean profits stay flat. But AWS is still a relatively small percentage of Amazon’s overall revenue. Amazon might be just fine collecting the millions more that cloud computing brings in each year so long as 10 percent of it remains pure profit.
Unless Rackspace is fine keeping profit margins where they are, though, it won’t be so lucky. The key to driving higher profits as a cloud provider appears to be adding value-added services above the infrastructure layer. Rackspace has always has “fanatical support,” so it might have to up its game into the fully managed cloud services like those AWS is offering with DynamoDB and Elastic MapReduce.
I have to think cloud computing is only an exciting new business model if it makes business better. As cloud becomes more and more of its being, we’ll see how Rackspace handles the change.
Image courtesy of Shutterstock user Netfali.