Top of Golden Gate Bridge peeking out of cloud cover
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Managed cloud services provider Rackspace announced its plans to buy former competitor Datapipe earlier this week. 

Terms of the deal were not disclosed, but San Antonio, Texas-based Rackspace noted it was "the biggest" in the company's history. 

With both companies offering managed cloud services to customers, why did Rackspace choose to buy its erstwhile competitor? 

Rackspace Grows Its Multi-Cloud Managed Services

At face value, the acquisition is about bringing new capabilities to Rackspace and expanding its global footprint.

In a blog post announcing the buy, Rackspace CEO Joe Eazor said the deal was the logical next-step after the company went private last year:

“When Rackspace went private late last year, we did so mainly because, at this point in our history, we need to make major, long-term investments in the capabilities our customers are demanding. And that’s just what we’re doing,” he wrote.

More to the point, he claims the deal will not only make Rackspace the leading provider of mutli-cloud managed services, but also the leading provider of managed public cloud services across all the hyper-scale infrastructure providers.

“It will have a big impact on our ability to deliver the multi-cloud services that today’s customers are demanding. They want us to give them expert, unbiased advice, and manage their applications on whichever clouds will best meet their unique needs. They want us to serve them at scale, from data centers and offices across the globe,” Eazor added.

Rackspace and Datapipe: Two Veterans of IT Services Market

Datapipe was one of the first players in managed public cloud services after its founding by Robb Allen in 1998, according to Crunchbase

Based in Jersey City, NJ, the company has with 825 employees, 29 data centers in nine countries and provides a single vendor solution for managing and securing IT services, including cloud computing, infrastructure-as-a-service, platform-as-a-service, colocation and data centers.

Rackspace, also founded in 1998, provides hybrid cloud-based services that enable businesses to run their workload in a public or private cloud. It claims to have 300,000 customers worldwide, including many Fortune 100 companies.

Once the deal closes, which is expected to happen at the end of the fourth quarter pending financing and regulatory approvals, the combined company will be in a strong position to compete in a cloud market dominated by Amazon, Microsoft, Google and IBM.

Market Reactions to Rackspace Datapipe News

Michael Fauscette: Supports Rackspace's Pivot From Competitor to Partner

Michael Fauscette, chief research officer at G2 Crowd, argues that the business realities of a market dominated by these companies pushed Rackspace to find a way around them.

“Rackspace has been on a mission to recast itself in a way that it is not competing with AWS, Azure, Google in the infrastructure/platform as a service public cloud business. Last year it started moving towards becoming a top managed hosting services company while continuing its private cloud business,” he told CMSWire.

“The repositioning turned Rackspace to a good partner candidate to the large cloud providers instead of a competitor. This acquisition, which is Rackspace’s largest to date, adds significant capabilities including expanded footprint, new customers in the enterprise and public-sector markets and new partners.”

He also noted the acquisition is good for Rackspace’s customer base, giving it traction it previously lacked in the enterprise space. The deal, Fauscette said, offers:

  • Enterprise customers, something Rackspace didn’t have as it was mostly a mid-market focused company.
  • Many public sector customers including UK’s Ministry of Justice, Cabinet office and Department of transportation
  • Datacenters in new geographies including Brazil, Russia, China and the West Coast of the US
  • A partnership with Chinese behemoth Alibaba Cloud

“The combined company will have a strong geo-footprint, a diverse set of customers and a broad portfolio of offerings including services. This will certainly make them much more competitive as a combined entity,” he added.

Venkat Ramasamy: Break the Market Dominance of the 'Big 3'

Venkat Ramasamy, Chief Operating Officer with Austin-based FileCloud, believes the new company will break the market dominance of the established infrastructure giants.

"The newly formed entity has a unique opportunity to serve large enterprises who fear the dominance of Amazon, Google and Microsoft clouds,” Ramasamy told CMSWire.

“Moreover, the 'Big 3' are focused on the mass market and can't cater to all cloud workloads. There is a large enough market for custom tailored public, private and hybrid cloud offerings. Rackspace plus Datapipe can fill this niche by positioning themselves as a specialist and should make a killing by playing in a slightly premium segment."

One other factor worth noting which Ramasamy believes is driving the deal is the need for relevancy in a very competitive market.

"Cloud is a scale business where economies of scale determine the fate of individual cloud providers. Industry leaders such as Microsoft, Amazon and Google have deep pockets to fund cloud investments needed to reduce cost and build scale."

“Smaller players such as Rackspace and Datapipe need to consolidate fast to capture enough share of cloud workloads to be relevant in the cloud infrastructure race."

Sash Sunkara: A Sign of Market Consolidation

For Sash Sunkara, founder and CEO of Fremont, Calif.-based cloud deployment specialist RackWare, the deal is knee-jerk reaction to wider market consolidation driven by the need to provide cloud offerings that are bigger and cheaper.

"The endless search for bigger, better, faster and cheaper continues to claim more names and will continue to do so throughout 2017 and beyond. This acquisition is just another example of the market reacting to a failure instead of proactively planning for the longer term. The failures, as in datacenters going down, are real and can wreak untold havoc at the enterprise business level,” she said.

"Market leaders, such as Oracle and IBM, are well equipped with the right solutions and long-term plans to handle the hybrid cloud movement. It is essential to incorporate a multi-cloud plan into any digital transformation endeavour and just as vital to select the right solutions to get there."

Brian Klingbell: A Sign of 'Where IT Is Headed'

The final word goes to Brian Klingbeil, COO at Chicago-based cloud infrastructure provider Ensono, said the acquisition points to a growing demand for multi-cloud management solutions.

“The acquisition of Datapipe is a clear demonstration of where IT is headed,” he told CMSWire.

“Over the past year, we’ve consistently seen a growing demand for multi-cloud environments, and MSP [Managed Services Providers] that can’t meet that demand will ultimately fall behind. It’s imperative for MSPs to have the expertise to manage multiple IT infrastructures.

“Ultimately, these 'cloud wars' will breed innovation, causing MSPs to be more strategic and innovative with their offerings. Clients can reap the benefits of that competition."