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Acquisition Threat Casts Pall over Cloud

- Blog

By Lawrence M. Walsh, CEO and President, The 2112 Group

Rackspace is one of the best known and most popular hosting companies in the business today. Its brand equity is so great, it’s often mentioned in the same breath as Amazon Web Services and Microsoft Azure, two companies significantly larger in size.

Despite acquisition rumors, Rackspace CEO Lanham Napier says the company will remain independent and focused on growth.

The Texas-based company has lofty ambitions in cloud computing and stands a good chance of achieving many of them if it just weren’t for one little problem: the threat of acquisition.

In the wake of Verizon Communications’ purchase of Terramark Worldwide and Time Warner Cable buying NaviSite, Rackspace was among the strong mid-tier hosting companies cited as potential acquisition targets for big IT companies looking to buy their way into the cloud market. Hewlett-Packard and Dell were both eyed as would-be suitors for Rackspace’s hosting capacity and large customer base.

HP’s announcements of big pushes into the cloud rekindled mutters of Rackspace being a strong acquisition target. To its credit, Rackspace says it will remain independent and focused on growing its cloud business.

Despite acquisition rumors, Rackspace CEO Lanham Napier says the company will remain independent and focused on growth.“I absolutely have a fiduciary obligation, and I work for the stockholders. But we’re trying to build something great, and greatness isn’t achieved overnight. We’re just getting going. When I think about the market opportunity to build the service leader in cloud computing, I think little old Rackspace will win that one," CEO Lanham Napier told Dow Jones Newswires.

Stepping forward in its ambitions, Rackspace last week announced a partnership with Dell and Equinix to develop and open-source cloud-computing platform called OpenStack to compete head-on with AWS’s platform and infrastructure services. It could also stand as a significant alternative to the platforms being developed by HP, Microsoft and Google.

How hot is cloud computing? With the global market expected to soar to upward of $200 billion annually by 2015, every vendor, service provider, carrier, managed service provider and VAR is looking to find their place among the clouds. As a result, there’s a land-grab in the market where IT companies – particularly the legacy vendors – are looking to acquire their capacity in the cloud to build their future revenue streams and satisfy Wall Street’s craving for recurring revenues.

For solution providers, the choices in cloud aren’t all that clear. Many cannot afford the significant capital costs for building and maintaining cloud infrastructures. In fact, Rackspace’s capital-intensive business model is often criticized by financial analysts as being too expensive to sustain. Instead of spending precious cash, small and mid-tier solution providers – and even some large service providers – are partnering with infrastructure companies to develop and build their cloud businesses.

Partnering in cloud infrastructure doesn’t mean solution providers avoid costs – direct or indirect. Solution providers looking to companies like Rackspace, Savvis, GoDaddy, The Planet and the plethora of others like them must invest in the deployment and integration of applications and management systems. They must train their sales and technical support staffs on the intricacies of hosting systems; and they must educate their customers to the particulars of their cloud offerings and why their partnerships contribute to the reliability of services.

Some people may think this sounds trivial, but Channelnomics has talked with several service and solution providers who partner with hosting companies for their cloud services. The current state of the art in cloud control panels, virtual server management and multi-tenant application management is so complicated that many solution providers are reticent to change platforms even when their dissatisfied with their hosting partners or are presented with a better offer.

Now, let’s add the threat of acquisition to this equation. Large vendors and carriers may pick off hosting and cloud companies for their capacity, but integration into a consolidated network is an arduous and disruptive process. Just as we see when hardware and software vendors disrupt the normal operations of a company they’ve bought, there’s a strong likelihood even greater disruptions will occur over the course of cloud consolidation.

Alongside Rackspace as a favorite acquisition target is Savvis, which just announced its new strategy for growing its cloud business. Savvis remains focused on cloud growth, but its chief executive, Jim Ousley, is fielding more calls from financial analysts and investment bankers looking to capitalize on the cloud trend. Remember, the Wall Street guys don’t necessarily put together good companies, but rather companies that will make them money off transaction fees. And that makes every hosting company a target.

Verizon spent $1.2 billion on Terramark. Billions more will be spent before the cloud land-rush is over. Undoubtedly this acquisition climate will only make solution providers’ transition to cloud computing that much more complicated.

Lawrence M. Walsh is CEO and president of The 2112 Group , a technology business advisory service that specializes in optimizing indirect channels and partner relationships. He’s also the executive director of the Channel Vanguard Council. He is the former publisher of Channel Insider and editor of VARBusiness Magazine. You can reach him at


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