Rackspace (RAX) says it expects to be able to build its cloud computing infrastructure for less than it originally believed. The financial crisis is likely to make its data center expansion cheaper, allowing the San Antonio company to buy rather than build. There are also advantages available to companies with existing hosting operations that expand into the cloud - like the ability to get more mileage out of server hardware.
Rackspace said Tuesday that "larger use of recycled equipment" was one of the trends allowing it to reduce its capital expenditures for 2008 by $40 million. "The cloud computing operation gives us the ability to reuse servers pulled off the shelf after customers have left us," said Rackspace CFO Bruce Knooihuizen. "Cloud computing is much more capital efficient, and gives us an avenue to use the older equipment."
Here's how it works: When Rackspace signs up a new managed hosting customer, it buys a new server and leases it to them for a monthly fee. When that customer leaves or upgrades to new hardware, Rackspace get the machine back. Reselling pre-owned servers to new managed hosting customers isn't usually an option. But those used servers can now be incorporated into cloud computing grids, which are typically powered by commodity servers.
Since cloud platforms spread computing power across large numbers of servers, redundancy can be managed at the software level, reducing the impact of a hardware failure for an individual server. In theory, this allows providers to sustain a higher degree of hardware failures than would be acceptable in single-server managed hosting, and just route around any failed servers.
Rackspace is focusing on cloud computing because it believes that it can get more revenue out of each server, maximizing its investment in hardware. President and CEO Lanham Napier said that the company expects its cloud hosting services to be "higher growth, higher margin businesses than our managed hosting.” Reusing servers in cloud computing contributes to the economic advantages of cloud computing.
While CFOs and securities analysts love the idea of reducing capital expenses by reusing pre-owned servers, customers may be more wary. Reliability issues are among the primary concerns for enterprises considering cloud computing, and the integration of pre-owned servers into clouds will likely reinforce their focus on service level agreements (SLAs) stipulating provider uptime targets.
Equipment reuse also could eat into the market for new cloud servers, a niche that has been targeted by server vendors including Rackable, Dell, HP and IBM. Rackspace, for one, is clearly planning on spending millions less than it expected on new servers.