Is This The Beginning Of Cloud Consolidation? Rackspace Looks At Exit Options

The news today at Bloomberg  is that Rackspace has hired Morgan Stanley to look at “strategic options” for the future. Rackspace has long been something of a bridesmaid in the cloud infrastructure space. Previously dwarfed by the number one player, Amazon Web Services, the San Antonio-based company now has to contend with some very strong cloud infrastructure plays from others including Microsoft , Google and IBM – all companies with far bigger footprints, and deeper pockets than it has.

Several years ago, seeing the obvious difficulty involved with competing on this playing field, Rackspace co-founded the OpenStack initiative, hoping to parlay an open source cloud platform into commercial success for itself – since then it has had a few different strategic focuses – first differentiating through “fanatical support”, later a focus on building clouds for telcos and other Managed Services Providers, more recently forays into the all-too-busy private cloud space. Rackspace is a company that has been cornered with every turn – it was always hard to see how it could really break out of its bit-player position.

When you add to that the fact that it was trying to compete in a market that is characterized by incredible levels of capital investment, you’ve got a difficult situation for a smaller vendor. Seemingly every week there is another announcement from IBM , HP, Cisco or another large vendor of a $1B cloud investment – much of this, of course, goes to building out global data center footprint. While on the one hand the $1B figure can be seen as simply marketing spin, it is indicative of the sort of numbers that are needed to even have a seat at the table. For an insight into just how important capital investment is for a public cloud vendor, one only needs to look at this comparative chart produced by The Register:

Rackspace has spent around $1B in cloud investment since 2005, a massive number for sure, but dwarfed by the numbers its competitors have invested. It comes as little surprise then to hear that Rackspace is looking at its options. In a statement confirming the Bloomberg story, Rackspace said that:

In recent months, Rackspace has been approached by multiple parties who have expressed interest in a strategic relationship with Rackspace, ranging from partnership to acquisition. Our board decided to hire Morgan Stanley to evaluate the inbound strategic proposals, and to explore any other alternatives which could advance Rackspace's long-term strategy. No decision has been made and there can be no assurance that the Board’s review process will result in any partnership or transaction being entered into or consummated. The company has not set a timetable for completion of this process and does not intend to discuss or disclose further developments with respect to this process unless and until the Board approves a specific partnership or transaction

With this news comes the obvious speculation of who might be sniffing around. Clearly HP is likely to be in the hunt, its recently announced re-focus on public cloud provision via the Helion project, and indications from CEO Meg Whitman that some big acquisitions are not out of the question would suggest they’re a likely candidate. But other players are possible as well.  AT&T in particular is a company without a particularly strong cloud story – contrast its lack of cloud readiness with that of telco competitor CenturyLink who has acquired left right and center. The CenturyLink stable now includes Savvis, Tier3 and AppFog – all top shelf cloud vendors.

On the one hand this news is sad – Rackspace has been an important player in the industry. But it also indicates that we’re seeing a real rationalization start to take shape. The removal of a few bit players and the consolidation of some others will leave us with less diversity, but also more clarity for customers when it comes to decision making time.