Why Amazon wants a piece of Rackspace
Reuters sources claim that Amazon is in preliminary talks acquire a minority stake in managed cloud computing services company Rackspace. While the discussions are still in the works, Amazon’s decision to invest in yet another cloud computing company makes complete sense to bolster its AWS division. Unlike Amazon’s recent cloud technology acquisitions, like flash-based startup E8 storage, acquiring a stake in Rackspace means gaining further influence over a physical network of global colocation services that are host to platform-agnostic environments full of AWS’s rivals.
The last five years have seen big changes at Rackspace. The company, which once was trying to compete directly with the large cloud players, has relaxed its growth approach and is instead focused on investing in its services over massive infrastructural reach. In 2016, Apollo Global Management acquired Rackspace in a $4.3B leveraged buyout and left the company with a large amount of debt. Rackspace’s IPO this month raised $700 million, part of that raise will help pay off that debt. This puts Amazon in an ideal bargaining position financially as Amazon’s overall earnings are strong. Despite these strong financials, Amazon sees the need to keep building a more robust cloud infrastructure. Amazon’s Q2 earnings indicated a slowing of AWS revenue, slowing to 30% for the first time. Both Microsoft and Google have also reported a slowing of cloud revenue as the pandemic pushes companies to reduce their investment shifting businesses to the cloud.
Amazon and the other cloud giants have been increasing investment in their cloud networks since their inception. This is why we’ve seen companies dumping money into submarine cable networks. We’ve also seen the construction and expansion of data centers across the globe, especially in underserved markets. Simply building compelling cloud products is not enough if your backend isn’t diversified. The success of the largest clouds is dependent upon making sure your network is available to the maximum number of customers in as many physical locations as possible. Geography still plays a vital role in the development of the cloud. This is one of the reasons Rackspace is a good fit. Its colocation offerings have geographic reach and its overall business model is focused on building a strong connection to its customer base in different markets.
Equally as important, Rackspace hosts AWS, Azure, and GCP under one roof. If Amazon could have even a small amount of influence or insight into Rackspace’s internal workings, Amazon could leverage that information for its benefit. Decisions about server location and demand from customers would help Amazon plan into the future. Even without these benefits, an investment into Rackspace would have very few downsides, if the price is right. Regardless of how this deal shakes out, it would not be a surprise if other companies look to exercise their influence on third-party data center providers through future acquisitions.