Posted By Rich Miller On February 26, 2009 @ 3:12 pm In Cloud Computing,Rackspace Hosting | 2 Comments
Cloud computing is hot. But is it profitable? And if so, does the business model extend beyond Internet titans running giant data centers? Cloud market leader Amazon (AMZN) has yet to break out any customer or revenue data for its Amazon Web Services unit. But another public cloud builder, Rackspace Hosting (RAX) provided details of its cloud computing operations in last week’s earnings report, and the numbers provide some interesting contrasts with the company’s traditional power base in managed hosting.
Rackspace beefed up its cloud operations with its recent acquisitions of JungleDisk and SliceHost , which is reflected in a huge jump in its cloud customer count. But the revenue from these customers pales in comparison to the managed hosting operation:
Let’s look at these numbers using average revenue per user  (ARPU), a common metric for hosting performance: each cloud computing customer produced an average of $254 in net revenue in the fourth quarter, while the managed hosting business averaged $7,265 per customer.
The math suggests that Rackspace might be better off focusing on its managed hosting business. It’s a little more complicated than those numbers might suggest. But even if it Rackspace raises the ARPU for its cloud business, it has a ways to go before it approaches the managed hosting operation. So why is Rackspace so gung ho about cloud computing?
For Rackspace, the cloud represents both a threat and an opportunity. Here’s why:
It’s important to note that ARPU isn’t an effective metric for the relative profitability of the cloud computing and managed hosting operations, as it doesn’t include costs for hardware and customer support – areas where cloud hosting and managed hosting have very different profiles. A single managed hosting customer may require many dedicated servers, while each cloud computing server will be expected to provide resources for multiple customers.
Benefits for Providers?
The benefits of cloud computing  for customers are well understood. But what about the benefits for providers? As we’ve previously noted , Rackspace is focusing on cloud computing because it believes that over time it will get more revenue out of each server than in managed hosting.
Rackspace 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.”
That extra mileage comes from improved utilization – the ability to pack more customers onto each server in a cloud platform – as well as an extended lifespan as retired servers  from the managed hosting business are incorporated into cloud computing clusters with higher fault tolerance.
Server Utilization as Differentiator
If server utilization is the key to cloud success, does this tilt the playing field in favor of existing server farm operators with economies of scale? Or can customized service offerings and exceptional support build lucrative niches in the cloud? Rackspace, with about 125,000 square feet of technical space and its emphasis on “Fanatical Support,” may be positioned to play on both fronts.
We’ll get better metrics on the per-server revenue and profitability of cloud computing over time. Rackspace should be commended for breaking out its cloud computing operation to provide better insight for investors, and give analysts a means of tracking the company’s progress on its foray into the cloud. Let’s hope Amazon follows suit very soon.
Article printed from Data Center Knowledge: http://www.datacenterknowledge.com
URL to article: http://www.datacenterknowledge.com/archives/2009/02/26/rackspace-and-the-economics-of-the-cloud/
URLs in this post:
 JungleDisk and SliceHost: http://www.datacenterknowledge.com/archives/2008/10/22/rackspace-acquires-jungledisk-slicehost/
 average revenue per user: http://en.wikipedia.org/wiki/ARPU
 cloud computing: http://www.datacenterknowledge.com/archives/category/cloud-computing/
 previously noted: http://www.datacenterknowledge.com/archives/2008/11/07/is-your-cloud-new-or-pre-owned/
 Rich Miller: http://www.datacenterknowledge.com/archives/author/richm/
Copyright © 2012 Data Center Knowledge. All rights reserved.