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Commodity Cloud Providers vs. Managed Cloud Specialists

If you type “cloud computing + commodity” into a search engine, you’ll see that in recent months, the two have become seen as virtually synonymous. Many industry pundits now sweepingly assert that all cloud services are akin to red durum wheat or West Texas crude. All are identical. All prices and profits will be pushed lower and lower and the biggest players will drive everyone else out of business.

For example, an article this week in The Motley Fool — a site that I admire for its knowledge of investing (if not of cloud computing) — cited the price for a 15GB cloud server from Rackspace, at our basic service level. The article compared our price to the one for a server of the same size at a commodity provider. The commodity server costs 40 cents an hour less than ours for what the article’s writer assumed was “the same service.”

The two services, however, are as different as an apple and an apple pie. For that additional 40 cents, the Rackspace customer gets 24×7 access to cloud engineers, including specialists in a host of complex technologies such as data stores and digital marketing platforms. The Rackspace customer gets architecture guidance, a security audit, and system monitoring and alerts — just to name a few value adds. Additionally, Rackspace engineers will log into the customer’s servers to troubleshoot and make fixes when needed. The commodity providers won’t do that.

Now, let’s do the math to understand whether the Rackspace service is worth the extra cost, or whether you’d be better off renting the cheaper hardware and paying your own engineers to run it 24×7. At 3,504 hours in a year, our 40-cent-an-hour price difference would cost you, at most, an extra $3,456 a year. (I say “at most” because you probably wouldn’t use the server nearly that much, and you only pay for what you use in the cloud.)

Now, let’s assume you are running 10 of these servers, which takes the Rackspace premium up to $34,560 a year. You could instead rent the cheaper hardware. But you’ll need someone to run it. Good luck finding even one engineer to be on call 24x7x365 for even three or four times the Rackspace premium. You could push the job onto your software engineers, but that would cost you even more by diverting your most precious resources from their most-valuable task: writing code and shipping product. Which is the better deal? You can decide. But one point is clear: the Rackspace managed cloud is a different deal than the one you get with unmanaged, commodity cloud infrastructure.

I shake my head whenever I see the assumption that all cloud services are the same. Those making this assumption profoundly misunderstand the widening variety of needs and preferences among business customers in our market — and the difference between commodity providers and specialists.

I also can’t help but smile at this line of thinking — because we at Rackspace have been hearing it ever since we launched our company 15 years ago. Even before the advent of cloud computing, when we provided managed hosting on single-tenant servers, the industry experts warned us that Verizon and AT&T and other giants would crush us with their economies of scale, their ability to bundle hosting with other services, and their price cutting.

And yet we’ve grown from a five-person startup to a global company with nearly 6,000 Rackers (as we call ourselves) on four continents, more than $1.5 billion in annual sales, solid profits, and a strong balance sheet. How have we been able to do that as a relative pipsqueak up against giants in a “commodity” industry?

Consider that all of our prices and those of our competitors are publicly available on the Internet. Any customer who is looking for a cheaper alternative to Rackspace can find it with a few keystrokes. So if what we sell is an undifferentiated commodity, why would more than 200,000 business customers in 120 countries pay us a premium price? Are they poorly informed?

I don’t think so. I talk with customers and prospects every day. Most run fast-growing companies of all sizes and leverage an expanding array of complex technologies. They know that while many of the raw materials that we use in our business — datacenter hardware and software and bandwidth — are increasingly commoditized, the delivery of complex IT services is not.

They know that while scalpels and X-ray machines are commodities, the services of a surgeon are not. They know that when you trust someone with your life or your business, you don’t just go for the lowest price. You go for the most-skilled, most-reliable practitioner that you can afford. You go for someone with specialized expertise.

Reuben Katz, CEO and founder of Geeklist, a popular social-collaboration platform for developers, explains that his shopping among cloud providers “was less about pricing and more about quality and speed — and boy did we find it at Rackspace. We’re running fewer cores and less memory, yet our performance has skyrocketed. Our load times are way faster. Working with Rackspace, we get a team of infrastructure and support specialists that ensure we’re running at peak performance.”

Is there a part of the computing services market that is commoditized? Absolutely. Millions of customers choose the vendors with the cheapest unit prices.

The industry giants are duking it out over the commoditized part of the cloud computing market. Each of them has expanded into cloud computing as a sideline, from a legacy business built on massive scale and minimal customer interaction. Each is very good at the low-touch, high-volume game that it’s playing.

That, however, is not the game that Rackspace is playing.

We serve and lead a different segment of the market — the managed cloud segment. We’re the No. 1 managed cloud specialist. We target the fast-growing category of customers who want a trusted partner to manage all or part of their cloud. These customers want to focus on their core business — on building a great new application, and winning new customers. They want to stay fast and lean, rather than swelling their payrolls with engineers to run IT that doesn’t differentiate their business.

Customers in this part of the cloud market seek exceptional support, including specialized expertise in complex tools and applications such as data engines and digital marketing platforms. They want experts in DevOps automation, and hosted VMware.

These customers are skeptical of cheap unit prices, which they know can be misleading. They care more about the total cost of achieving the uptime and stability and consistency that their businesses demand, with the level of support that they want.

Many of these customers are part of the trend toward use of hybrid cloud, highlighted in a recent Gartner report. They reject the notion, pushed by the commodity giants, that one size fits all; that every workload runs best on the public cloud. These customers want each of their workloads deployed where it will achieve the highest performance and cost-efficiency — whether on single-tenant or multi-tenant servers or a combination of those platforms; whether in our datacenters or theirs or those of a third party.

Alex and Ani, one of the world’s fastest-growing online retailers, uses the Rackspace managed cloud to prepare for traffic peaks and achieve a high ratio of performance to total cost. The retailer’s expandable wire-bangle bracelets drove sales of $230 million in 2013 — up 280 percent from the previous year. “To scale for this growth,” said Ryan Bonifacino, vice president of digital strategy at Alex and Ani, “we selected an ecommerce platform on Magento Enterprise Edition, hosted by Rackspace.”

The retailer uses a hybrid configuration of single tenant and multi-tenant cloud servers, including a powerful load balancing solution, monitoring, performance acceleration services, and separate environments to support non-consumer-facing solutions such as tools, inter-department collaboration, testing and staging.

“We have counterparts at Rackspace who are digital marketing experts,” said Bonifacino. “They know how these solutions work. Rackspace is the specialist. That’s valuable to us and proves that hosted technology is not a commodity; the people and the experience are what make the difference.”

Demanding customers such as Alex and Ani and Geeklist are the ones who ultimately define the shape of a market, and in our industry they are speaking quite clearly. They have decided that there are multiple market segments in the cloud: some commoditized and some quite specialized. The good news is that demand for cloud and hybrid computing is growing so rapidly — Gartner estimates that total spending on cloud services will increase from $110 billion in 2012 to $210 billion in 2016 (see “Forecast: Public Cloud Services, Worldwide, 2010-2016, 4Q12 Update” ) — that there’s plenty of business to go around.

Not all of that spending will go to the vendor with the lowest prices. If price were the only factor that mattered, we’d all buy our clothes at Costco. Don’t get me wrong: I’m a big fan of Costco. Its apparel department serves a segment of the market that wants functional clothing at a great price. But there are many other customer segments that shop at Nordstrom or Carhartt or Zara or Filson. It’s the same in cloud computing.

The technology evangelist George Gilder writes that every economic era is defined by “a great abundance and a great scarcity.” The businesses that prosper in each era are the ones that harness abundant resources to create scarce and valuable products and services. During the Industrial Age, the great abundance was of electrical and steam power. The great scarcity was of engineering talent to combine that mechanical power with raw materials and semi-skilled workers to deliver attractively priced goods such as clothing and hand tools.

I would argue that the great abundance in our industry today is computing hardware and software and bandwidth. The great scarcity is of talented human beings who can get all those raw materials to work together — people with servants’ hearts and expertise in the ever-evolving technologies of the cloud world who take pride in helping businesses leverage the power of the cloud without incurring the pain of becoming fluent in every cloud technology. Our customers know those people simply as Rackers.

About the Author

This is a post written and contributed by Taylor Rhodes.

Taylor Rhodes is President and CEO of Rackspace, responsible for all of the company’s operations in the U.S. and abroad. He has excelled in a variety of leadership roles in sales, support, and international operations, and is known for achieving high levels of engagement with customers and Rackers alike.

Before his promotion to President, Taylor served as Senior Vice President and Chief Customer Officer, with global responsibility for Rackspace’s Sales and Fanatical Support® organizations globally. He worked closely with the Product and Marketing teams to develop our differentiated strategy.

Taylor has also served as SVP and Managing Director, International, where he was responsible for developing the company’s strategic priorities and creating business growth across international markets in Europe, Asia, and Australia.

Taylor joined Rackspace in 2007 to lead the business unit responsible for delivering Fanatical Support to the company’s largest and most complex customers. He then went on to launch Rackspace Enterprise Services, a business unit that helped Rackspace expand beyond its SMB roots to provide larger customers with enterprise-grade offerings.

Prior to joining Rackspace, Taylor held a series of progressively more challenging leadership roles at EDS, managing end-to-end relationships with large global customers. He is a former US Marine Corps infantry officer and holds a MBA degree from The University of North Carolina at Chapel Hill.


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