US telco linked with Rackspace sale

US telco CenturyLink is the latest of several technology companies reported to be in discussions to acquire Rackspace Hosting.

Rackspace told investors in mid-May that it had asked Morgan Stanley to evaluate offers that had been made to acquire the company and to “explore other alternatives” for its future ownership.

A few months earlier, the company’s CEO and founder Lanham Napier had announced he would retire.

In the four months since appointing Morgan Stanley, deals have been rumoured with HP, IBM and others. BrightWire reported that CenturyLink was the first potential buyer to come forward, and by July a Wells Fargo analyst revealed that 11 suitors had been narrowed to two – CenturyLink and HP.

Bloomberg now reports that the telco remains the only interested party since Morgan Stanley began its formal approach to the market.

CenturyLink moved into the cloud computing and hosted services market via the acquisition of hosting company Savvis for US$2.5 billion in 2011, following hot on the heels of its US$12.2 billion buy of fellow telco Qwest to provide a stronger foothold in the business market.

Neither CenturyLink or the companies it has recently acquired (Savvis etc.) have any operations in Australia.

Rackspace invested AU$250 million to build out a modern data centre in Sydney’s northwest, via which it offers managed hosting services in competition with Telstra, Macquarie Hosting, Amazon Web Services and others.

Alan Perkins, a former regional CTO for Rackspace and now chief innovation officer for HP's cloud business in the Asia Pacific, was not surprised that telcos had been named as potential suitors. He predicted telcos would see cloud infrastructure services as "the next logical step beyond connectivity" back in mid-2011.

Perkins said that Rackspace positioned its services incorrectly by promoting itself as a "public cloud" competitor to Amazon Web Services and Microsoft Azure, a strategic blunder it has only recently begun to address by softening its messaging to be a provider of "managed hosting services".

"First positions are strong and almost impossible to shake," he said.

Amazon, Google and Microsoft have thrown considerable investment behind the build of cloud services at scale, allowing them to compete aggressively on price.

Rackspace, by contrast, has "underpinned its reputation and market position on the trademarked concept of fanatical support, a concept it has driven using a labour-intensive approach," he said.

Any telco looking to acquire Rackspace to offer cloud services at scale and lower cost would likely struggle to meet customer expectations around Rackspace's promise of 'fanatical support', he said.

"Getting the right cultural fit is a big challenge," he said. "Any attempt to scale the fanatical support concept risks damaging its core. If you try to automate it to drive efficiency, it will no longer be fanatical. If you try to reduce the cost structure by offshoring, you end up losing the essence in the translation.

"Any attempts to improve its delivery from a cost perspective could potentially damage it beyond recognition."

Rackspace were contacted but did not comment for this story.