5 Reasons you Should be Fanatical about OpenStack
Dave is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Delighting customers is a way of life at Rackspace Hosting (NYSE: RAX) and the industry has taken notice. By the end of the second quarter, the company had racked up more than 190,000 customers, many shelling out big bucks for Fanatical Support, Rackspace Hosting’s trademarked name for customer service. Their focus on customer service is working. Annual revenue has doubled to $1 billion in just three years, churn numbers have remained negative and their net installed base is growing at a rate of 1% per month.
But recently, Rackspace appears to be obsessed with something else – OpenStack, their new open-source cloud platform. The company has gathered strong industry support and has publicly committed to fully transferring its own operations to OpenStack in 2012. To make it happen, they’ve hired almost 500 people since January, a 12% jump in total headcount. They’ve even gone so far as to rebrand themselves, “the open cloud company.”
So what happened to Fanatical Support? Should investors be concerned that the company now seems fanatical about something else? Don't hit that sell button yet. Rackspace’s investment in OpenStack does not run contrary to their proven success with Fanatical Support. Actually, it’s essential to it. Here are five reasons why.
1. OpenStack Prevents Vendor Lock-in
Using Amazon (NASDAQ: AMZN), Google (NASDAQ: GOOG) or Microsoft (NASDAQ: MSFT) as cloud providers is like checking your code into Hotel California (Cue Don Henley: “You can check out any time you like, but you can never leave”). But the promise of an open-source cloud platform like OpenStack is the virtual elimination of vendor lock-in. That is, customers have freedom to move their code seamlessly between different OpenStack vendors. That's a pretty major selling point for enterprise companies who, as a rule, disdain sole-sources of anything. Large customers want vendor options and support they can count on. Rackspace now provides both.
2. OpenStack is at the Center of Cloud Commoditization
The advent of cloud computing has been a major disruption to how IT is deployed and software is consumed. As such, many different companies have jumped into the fray -- from giants like Amazon Web Services and Google Cloud Platform to smaller, boutique solutions -- all trying to provide the infrastructure upon which companies can run cloud-computing networks.
Translation: the cloud infrastructure level is being commoditized.
Rackspace was smart enough to get in front of the industry by co-developing a powerful cloud platform and then giving it away. OpenStack now enjoys the support of more than 180 industry backers and seems to have enough momentum to be the centerpiece of the industry’s commoditization. That means Rackspace will be able to sell service agreements (backed by Fanatical Support) to a much larger pool of customers than would be possible on their legacy platform.
3. OpenStack Might Woo New Enterprise Customers
Enterprise customers are the most profitable, but also the most gun shy when it comes to security. After all, who wants to put their mission-critical data on the internet, side-by-side with personal gmail accounts? Because of the way that OpenStack was designed, Rackspace can offer Fanatical Support from within their customers' existing data centers via a private cloud.
This is a bigger deal than what it seems. By using OpenStack, enterprise customers are able to keep their existing IT investments while they test drive the cloud in the comfort and security of their own network. If they like what they see, they can take the next step and seamlessly run their software on Rackspace’s public cloud. If that meets their expectations, they can enter the Promised Land -- throwing away at least a portion of their own expensive IT and paying Rackspace to manage it for them instead.
Amazon and Google do not currently have the tools to offer a private cloud as an intermediate step, forcing enterprise customers into an all-or-nothing decision about releasing their software into the public cloud. Which solution would you prefer? Rackspace looks poised to earn a lot of money selling these large customers lucrative Fanatical Service agreements on private and, in the future, public cloud solutions on OpenStack.
4. OpenStack Improves Fanatical Support
Believe it or not, Rackspace’s legacy platform did not allow them to provide enough support to win and service some customers. Lanham Napier, Rackspace’s CEO, was clear on this point in the last conference call:
“Up to this point, we have had situations with large customers that we literally just couldn't deliver Fanatical Support to them running a large app in our cloud, because we didn't have all the features that we needed. If you roll the tape out here for just a few weeks, we are going to start to resolve and address a lot of those gaps, which means we are expanding our addressable market."
One of the reasons that Rackspace is hotly pursuing OpenStack is to open up another market – those larger customers who required a higher level of support than they could previously provide. And since Rackspace got to define what went into OpenStack, you can bet that those issues were resolved long ago.
5. OpenStack Forces Rackspace to Remain Focused on What Matters Most
There is a downside to giving away OpenStack for free. Now, any vendor can create their own cloud service and compete head-to-head with Rackspace for customers. But you won’t get anything more than a shrug from Rackspace in response. That’s because it’s never been about winning customers. It’s been about differentiating services and winning customers who care that Rackspace has their back. If the company held a firm grasp on Fanatical Support before OpenStack, they should have a death grip on it now. As an investor, that helps me to sleep at night.
Still Fanatical After All These Years
The Rackspace story was, is, and always will be about Fanatical Support. In order for the company to continue their amazing growth trajectory, it must remain laser-focused on being the best at delighting customers. Under the covers, that’s what OpenStack is all about. That’s why, as a Rackspace investor, I’m fanatical about OpenStack. You should be too.
VTDave is not an investment professional, but that hasn't stopped him from blogging for the Motley Fool. He owns shares of Rackspace Hosting. The Motley Fool owns shares of Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Google, and Rackspace Hosting. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.