What the $4.3 Billion Rackspace Acquisition Means

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When I first read reports of the $4.3 billion sale of Rackspace to Apollo Global Management, a private equity firm in New York, I thought the news would be bigger than it ended up being. After all, Rackspace is a veteran in the web hosting industry — it was founded not long after GoDaddy, to give some perspective — and $4.3 billion is no small change.

It has become clear that the reason Rackspace’s sale, which happened on August 26, made so little of a splash is because it was all but inevitable, and for two very big reasons: Amazon and Microsoft. Why you ask? To explain that, we first need to take a brief look back at Rackspace’s origins and their primary business model.

A Brief Background of Rackspace

Rackspace began as a company that developed internet applications but soon found that potential customers who were interested in the products had little interest or know-how in hosting those applications themselves. The decision was made to transition from an application development company to a hosting company that primarily catered to the resource-heavy needs of business customers — customers who would need top-of-the-line hardware and networking speed to host busy websites, large and very active databases, and corporate email systems.

In 2006, Rackspace began offering a high-end cloud hosting solution to accommodate the ever-increasing resource needs of their business customers, which saw tremendous growth in customer base and revenue. In the years that followed, Rackspace added additional services, particularly in virtualization and email, that have made them into the respected, high-end provider of managed hosting services that they are today.

Rackspace and the Cloud Computing Market

But the trouble was that it simply didn’t have the financial capacity to keep up with the two undisputed giants in the cloud computing arena: Amazon, and Microsoft.

awsAmazon, the very well known and very successful e-commerce site, launched their own cloud computing service known as AWS, or Amazon Web Service, at about the same time as Rackspace. AWS has been tremendously popular with developers, software companies, and various cloud service providers who use it as their backend to provide services to you, the end user. CodeGuard, to take just one example, uses it as their infrastructure to provide cloud backup services to web hosting customers. It is cheap, very reliable, fast to setup, and just about perfect for internet companies to provide services of whatever kind to their customers.

azureSimilarly, Microsoft launched Azure in 2008, a couple years after Rackspace and Amazon. While it is no surprise for Microsoft to follow others into new markets — because, in all honesty, when was the last time we’ve seen genuine innovation from Microsoft? — it’s also no surprise for them to eventually see success in those markets. Azure offers, in broad terms, basically the same sort of services that AWS does, though of course, Microsoft provides certain custom tools and features you won’t find elsewhere.

Amazon and Microsoft have long been two of the tech industry’s biggest giants, which gives them the ability to throw an inordinate amount of funding and manpower at a project. And those projects have been unbelievably successful. In a recent report by Synergy Research Group, which provides market analysis for the networking and telecom industries, Amazon takes about 31% of the entire cloud computing market. Microsoft, a somewhat distant second, takes about 11%. Coming in third and fourth are IBM and Google, respectively, who have been trying to catch up. Rackspace only makes it onto the graph when lumped in among the “Next 20” companies on the list.

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Rackspace has simply been unable to keep up with the tech industry behemoths. And in fact, this has been fairly well known for quite some time. At around this time last year, Rackspace announced that they were partnering with Amazon — their largest competitor — to begin offering managed services for AWS. And that has been the direction the company has been moving in since.

So what does the $4.3 billion Rackspace acquisition mean? It means that the future of the cloud computing market that caters to the high-end needs of developers and business customers will continue to move toward Amazon and Microsoft — and likely Google, too.

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