How Rackspace lost its mojo

Editor’s note added Sept. 4: After publishing this post, we received a detailed response from Rackspace addressing several factual points in the story. We’re including Rackspace’s response at the bottom of this post.

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Internet darling Rackspace Hosting could do nothing wrong. From the depths of the great recession, its stock rocketed from a low of $4 to a dizzying $80 a share in about four years. It launched its own cloud platform — based on Open Stack, the cloud platform it pioneered — with confidence and all cylinders firing. Their future seemed bright.

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Fast forward to today, the stock has fallen almost 70 percent. Lanham Napier suddenly resigned from his chief-executive position, and the company announced to the world that it’s been shopping itself around.

What happened?

In what could be one of the greatest hosting faux pas of all time, Rackspace lost its core positioning. Established as a dedicated hoster, Rackspace’s claim to fame was understanding most people wanted managed hosting — the people who gave them great margins, low churn, and high lifetime value. The company wrapped its service around its “Fanatical Support” message and PR stunts like straight-jacket awards for great customer service, which drew industry praise. Rackspace hammered this message, with great focus, and great success for many years.

Inexplicably, this all changed with the introduction of its cloud product. Rackspace abandoned its “managed hosting” and “fanatical support” messages and shifted to position itself as “the open cloud company.” The cloud product, sold as infrastructure as a service (IaaS) with optional support, completely abandoned the Rackspace service first mantra. With security being a top concern for potential cloud customers, Rackspace created an uphill battle for potential customers who had to convince their boards and C-level executives that they should put their company’s critical data into an “open cloud” — a Herculean task.

It’s important to note that Rackspace has continued to grow and is often selected as a top place to work. But for it to regain the mojo it once had, it must decide what its positioning statement will be. Is it competing against AWS and similar hosting services on the IaaS front? According to president Taylor Rhodes, no, but then maybe yes. Is it focused on providing managed hosting, which is still the largest part of its revenue? Maybe, but it’s called “dedicated cloud” on the company’s financial statements. In fact, Rackspace doesn’t claim any category to be “managed cloud” on its financial statements, yet it’s the No. 1 managed cloud company, according to its own website. It does offer dedicated cloud and public cloud services, though. Confused yet?

For Rackspace to escape its self-imposed marketing purgatory, it needs to figure out what it wants to be. From a clear position as a managed-hosting provider, Rackspace has devolved its marketing message into a mishmash of industry jargon that has trouble conveying what it stands for. While the company can continue to grow based on its existing momentum, for Rackspace to regain its mojo, it needs to clearly define what it is in the marketplace.

Marty Puranik is founder, president and chief executive of cloud-hosting company Atlantic.net.

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Response from Rackspace:

Rackspace encourages an open dialog around all topics related to the cloud computing industry.  Marty Puranik of Atlantic.net is welcome to his own opinion, which we will not refute.  However, facts are not open to interpretation and we’d like to address several factual inaccuracies in his post:

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1.  Paragraph 2, sentence 1:

Claim: Between the stock’s high and “today” (Sept. 3), “the stock has fallen almost 70 percent.”

Fact: The Rackspace stock’s all-time high was $79, not $80.  Its low on Sept. 3 was $35.72. That means it had fallen 43 points from the high to Sept. 3.  Forty three as a percentage of 79 is 54 percent, not 70 percent as indicated in the post (see the Rackspace Stock Chart).

2.  Paragraph 5, sentences 2 and 3:

 Claims:

“Rackspace abandoned its ‘managed hosting’ and ‘fanatical support’ messages.”

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“The cloud product, sold as IaaS with optional support, completely abandoned the Rackspace service-first mantra.”

Fact:  Rackspace has never moved away from its customer-first approach and Fanatical Support promise. Every customer gets Fanatical Support, and always has. Higher service levels have always been available for those who want them, but Fanatical Support has never been optional. From a marketing perspective, we have always used the open cloud, Fanatical Support and managed services messaging concurrently, not consecutively.

3.  Paragraph 6, sentences 3 and 4:

Claim: “Is it competing against AWS and similar hosting services on the IaaS front? According to Taylor Rhodes, no, but then maybe yes.”

Fact: Rackspace has made it explicitly clear that it is the leader of the managed cloud market segment, and focuses on different customers than AWS and the other commodity providers (see blog post from Rackspace President, Taylor Rhodes: “Managed Cloud: A New Way to Stay Fast and Lean.”)

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4.  Paragraph 6, sentence 7:

Claim: “Rackspace doesn’t claim any category to be ‘managed cloud’ on its financial statements, yet it’s the No. 1 managed cloud company according to its own website.”

Fact: Since the launch of our new positioning as the No. 1 managed cloud company, Rackspace has made clear that “managed cloud” refers to the market category that we lead. Everything we do is “managed cloud.”

Rackspace’s leadership of the managed cloud market category has been confirmed by Gartner Inc. in both the U.S. and European versions of its latest Magic Quadrant for Cloud Enabled Managed Hosting.

Our positioning is also, contrary to Puranik’s claim, clearly stated in our latest 10-Q filing with the SEC, for the quarter ending June 20, 2014. On page 13 of that document, the brief “Overview of our Business,” reads as follows:

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Rackspace is the world leader in the managed cloud segment of the business IT market. We serve hundreds of thousands of business customers from our data centers on four continents. We help them tap the power of cloud computing without the pain of having to become experts in dozens of complex technologies, and without the expense of hiring or contracting with engineers who do not differentiate their businesses.

Our focus on the managed cloud separates us from the big providers of unmanaged, commodity cloud computing, who rent out access to raw cloud infrastructure and then expect customers to do everything required to operate that infrastructure, as well as the many tools and applications that run on top of it, including data engines and e-commerce platforms.