Rackspace public cloud struggles against Amazon's AWS

Heavy investment in its open cloud vision reduces its margins

Rackspace Hosting Inc, whose core business in dedicated hosting but which is also a rising player in public cloud services, reported better-than-expected second quarter results. Overall revenue rose 18 per cent to $376m (£242m), but shares finished slightly down.

A pioneer of the OpenStack IaaS venture, Rackspace shares have suffered recently as its public cloud operations compete with the likes of Amazon's services. After the previous quarter's figures were released in May its stock fell by 15 per cent.

OpenStack, which was originated by NASA and Rackspace, is an open-source collaboration of developers and technology firms - Red Hat, IBM and HP among others - which aims to create cloud standards such as open APIs that enable better interoperability between different types of clouds and between different vendors, increasing transparency alleviating the problem of vendor lock-in. Rackspace moved all of its public cloud offerings to OpenStack a year ago.

The firm has been spending heavily on promoting its vision and expanding into new territories, recently adding or extending facilities in Australia, the US and Hong Kong.

This expenditure, together wih modest increases in revenues from its core business - dedicated hosting - has lowered its margins, and worried some investors. The firm's CEO Lanham Napier explained that Rackspace's strategy is to push its hybrid cloud vision, which he expects to take off over the coming quarters.

"Our primary goal is to accelerate revenue growth," he said, expressing an aspiration to return to the 30 per cent growth rates across the entire business that Rackspace previously enjoyed.

The problem for Rackspace is that its open cloud model is up against proprietary public cloud services from the likes of Amazon, Microsoft and Google which have far more spending power and which, in the case of Amazon at least, are growing more quickly.

While Rackspace's public cloud revenues grew 36 per cent year-on-year from $73m to $99m (£64m), growth at rival Amazon AWS was almost double that at 64 per cent to $844m (£453m).

After an initial rise, Rackspace shares closed slightly down on Wall Street yesterday.