17 February 2010 3 Posted by Paul Burns
Background
Earlier posts have discussed some of the strategies that can be followed by infrastructure as a service (IaaS) providers. At a high level, IaaS strategies are typically based on some mix of low price (offering lowest prices per unit of value), high differentiation (offering unique capabilities), and focus (selling to a more narrow group of customers).
These posts also mention that there is no single right or best strategy for all IaaS providers. Instead, the question must be answered individually by each IaaS provider. To arrive at a profitable answer, each provider must also first understand customer needs, segmentation of customers, their own unique capabilities, strengths and weaknesses of competitors, and many others.
New Developments
On February 16th, 2010, Rackspace Hosting, Inc. (NYSE: RAX) held its Q4 2009 earnings call. Rackspace is a very large hosting and cloud computing services company, and reported total 2009 revenue of $629 million. As a publicly traded company Rackspace provides valuable insight to the world of cloud computing. Here are a few interesting nuggets:
- 125% 2008 to 2009 revenue growth with its cloud computing services
- 9% of 2009 revenue came from cloud computing services
- Cloud revenue grew 9.5 times faster than managed hosting revenue in 2009
Rackspace also provided insight to its strategy. While Amazon Web Services has clearly chosen a low cost strategy, Rackspace is equally clear in its selection of a differentiation strategy. For Rackspace, it is all about higher levels of support – what it calls Fanatical SupportTM. Lanham Napier, CEO of Rackspace, had a lot to say which reinforced this approach:
- ”We will serve businesses willing to pay a premium for a world-class service experience, because they are running an important IT apps in the cloud.”
- ”As we won the first phase of our industry, we differentiated around being a service leader. It’s about Fanatical Support; it’s about providing a world-class service experience to our customers.”
- ”… we’re trying to build one of the world’s greatest service companies, we’re trying to build the greatest service company in tech.”
- ”… Amazon has cut its price, and their price move has not had any impact on our take rate, in our cloud.”
- ”If people want commodity experience they are not to call Rackspace. We’re about providing a world-class service experience that we call Fanatical Support so that will remain our point of difference.
Can it be any clearer? Well done Lanham! This is called picking a good strategy and being totally committed to it. Rackspace certainly understands the value of low prices. However, the company also understands that it is able to provide higher levels of service at a higher margin to a large customer segment.
What does this mean?
This and previous blog posts have demonstrated that two separate companies, Amazon and Rackspace, can be successful by following different strategies. Many readers will find that obvious. Good. After all, it is far more difficult for two of the largest companies in a given market to be successful when following the *same* strategy. For instance, if two companies want to be the low price leader, they will tend to lower prices until one of them is no longer able to keep up with the cuts. That sort of head to head competition is not usually healthy. Even customers lose if a provider is ultimately driven out of business.
At the same time, I come across a few too many value propositions from cloud computing service providers that appear to emphasize low cost. With the huge amount of coverage that Amazon receives in the press and social networks, it “seems” (and I’m speculating here) that some service providers feel low prices is *the* value proposition for cloud computing. But Rackspace, for one, has kindly demonstrated that low price is not the only factor in the cloud computing value proposition.
There are a number of other cloud computing service providers that are defining strategies around differentiation. Some emphasize security while others emphasize higher performance infrastructure. There are *many* other ways to differentiate. There are also ways to focus (a 3rd strategy beyond low cost and differentiation) on unique customer groups. I’m looking forward to seeing more success in cloud computing that is driven not just from investment and execution, but from picking a good strategy and committing to it.
Table of Contents
Reader comments
Fanatical Support
Posted by Anonymous
The challenge is that Fanatical Support is expensive regardless of scale. This means margins will be slim compared to those that use significant automation. Low margins are something that the financial analyst community will eventually cease to reward, regardless of growth. Reducing cost usually follows an offshoring path which (almost) inevitably leads to service degradation. It would seem that Rackspace will eventually be faced with a decision (this will be one among many) to continue to on current growth trajectory while looking for ways to cut costs while still offering Fanatical Support OR redefine what Fanatical Support means to accommodate their business model. No easy answers…
Mark
quigleymar@gmail.com
Fanatical Support
Posted by Paul Burns
Labor intensive support can of course put downward pressure on margins (from the cost side). On the other hand, “above and beyond” support can also enable premium pricing and therefore higher margins. So there is a balance. Fortunately, high levels of automation and high levels of support can happen at the same time – at least to some degree.
Rackspace is certainly doing some things right. Just yesterday the company posted some very healthy margins.
As you say… “No easy answers…” There is plenty of competition, some with greater focus on automation.
Paul
Fanatical Support
Posted by Anonymous
Correct on premium pricing, but I can predict a market that is moving towards commodity which means premium pricing will decline regardless. In my opinion this means that companies that automate are going to fare better. To be fair, I guess a lot of it depends on target market i.e. savvy tech companies vs. small retailers that are not the same…still, I cannot see the commodity notion disappearing, particularly as the audience gets progressively more educated. That said, if Rackspace can change the service model to introduce value added services beyond ‘hosting’ (e-commerce transaction clearing a la Paypal, website analytics a la Google or whatever…) then the service dimension will remain. The margins may remain healthy in the short term, but the long term challenges need to be sorted out…
Mark
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