Rackspace (RAX) Rises on Cloud Partnership with Amazon

If you can't convince them, confuse them. Likewise, if you can't compete with them, partner them.

It appears that Rackspace HostingRAX is changing tactics yet again by providing tools and expertise for leading technologies and platforms, thereby keeping its options open in the rapidly growing and constantly changing cloud computing market.

Shares of Rackspace went up more than 5% yesterday, after this data center and managed cloud company entered into a strategic partnership to support's AMZN Amazon Web Services (AWS). The announcement was made at re:Invent in Las Vegas. AWS is a cloud-based platform helping companies to develop their online presence. It provides tools that support website production, social media and mobile applications that have taken the company to the leadership position in the infrastructure as a service (IaaS) space.

re:Invent saw Rackspace unveiling the following solutions - Fanatical Support for AWS, Managed Security for AWS, Compliance Assistance for AWS, and Managed Cloud for Adobe Experience Manager that supports AWS. These will help enterprise customers move their technology to Amazon's cloud. Financial aspects of the deal were not disclosed by either parties.

Jonathan Issler, Director of Operational Technology at Infosnap stated, "We have some workloads that run on AWS as well and we've researched other companies that could potentially provide support for this platform, but none were a good fit. When Rackspace approached us about its Fanatical Support for AWS offering, we signed immediately based on the strength of their managed cloud experience and expertise."

Rackspace - Amazon Relationship

Cloud storage came into prominence in 2009, with Nirvanix and Amazon's Simple Storage Service (S3) being two of the pioneers. Since then, Amazon has continued to dominate the space. The two companies (Rackspace and Amazon) were such fierce competitors in the past that a collaboration was unthinkable.

However, things changed in early 2014. Rackspace was countering declining margins in the midst of a cloud-computing price war and thus it stepped back from neck-to-neck competition with Amazon.

Instead, it started focusing on offering higher quality and higher-margin cloud computing services, something that Amazon has a poor reputation for.

This partnership is a perfect combination of two rivals Rackspace and Amazon; thus helping both to leverage each other's resources. It will ensure tighter integration between the two clouds. It will help customers to easily and securely move their data between the two platforms.

Cloud Opportunities

Cloud technology is being increasingly adopted across all businesses to innovate and drive growth. Gartner predicts that around $677.0 billion may be spent on cloud services between 2013 and 2016.

Further, according to Centaur Partners, SaaS and cloud-based business applications are likely to grow from $13.5 billion in 2013 to $32.8 billion in 2016, reflecting a compounded annual growth rate (CAGR) of 19.5%. Moreover, Computerworld forecasts that 42% of IT decision makers are planning to increase spending on cloud computing in 2015.

Rackspace, with its solid portfolio and growing partnerships, should be able to tap this opportunity.

Going Forward

As Amazon continues to expand and competition heats up, partnerships like the one between AWS and Rackspace will become increasingly important.

Last Words

It is worth noting that Rackspace had previously inked a similar deal with Microsoft MSFT . Under the terms of the deal, Windows Azure Infrastructure Services will be enriched with Rackspace's trademark "fanatical support".

These partnerships will add value to Rackspace's existing portfolio and the resultant synergies will benefit the company in the long run.

Although, the company is growing reasonably in the cloud market, growth prospects have been rationalized to a considerable extent due to intensifying competition from International Business Machines Corporation IBM . In such a scenario, we believe that the recent partnership will be much more beneficial for Rackspace.

Currently, Rackspace has a Zacks Rank #3 (Hold).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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