Rackspace Doubles Down On Open Source Process

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 |  About: Rackspace Hosting, Inc. (RAX), Includes: AMZN, GOOG
by: Dana Blankenhorn

Open source has been vital in creating the cloud. The open source process allowed many companies to use what began as Google's (NASDAQ:GOOG) MapReduce, evolving it into things like Hadoop (originally a Yahoo (NASDAQ:YHOO) project), entire cloud stacks like Red Hat's (NYSE:RHT) OpenShift, and services like Amazon's (NASDAQ:AMZN) EC2 in relatively short order.

It is also responsible, in large part, for the success of Rackspace (NYSE:RAX), a hosting provider based in a former shopping center on the northeast side of San Antonio. RackSpace got together with NASA to develop an open source cloud stack dubbed OpenStack, and its stock has not looked back.

But hardware hasn't been subject to such a process. Most companies have built their own server farms from parts. They have worked through the problems individually, the way Google originally did. This has resulted in companies like Facebook having to build server farms near the Arctic Circle because their servers need that cold air to avoid using air conditioning. Computing, right now, is accelerating global warming.

This is why the new Open Compute Project is important. By using the same open source process that turned MapReduce into Hadoop, cloud vendors hope to compete more closely with cloud innovators Google and Amazon.

While Facebook took most of the bows in New York, it's Rackspace that has the most to gain here. Rackspace has attained a valuation of $5.3 billion, and a PE of almost 100, based on its sponsorship of the OpenStack Project for cloud software. Its hope is that OpenCompute can do the same thing for its hardware costs, and thus for its general competitiveness.

Strip away its adherence to the open source ethos, after all, and Rackspace is just a hosting vendor, no different from hundreds of other small hosting companies like Westhost or SoftLayer. At some point this competition will come down to costs, as usage of the resource scales exponentially. Low cost infrastructure will win.

Right now costs are not the key issue in the cloud. Right monetization is the issue. That's why every vendor – from Oracle (NYSE:ORCL) to Dell (NASDAQ:DELL) to Apple (NASDAQ:AAPL) – can call what they do “cloud.” But as usage increases 10 times, then 100 times and 1,000 times, what seem like small differences in costs now will become magnified into big differences in profitability.

Open source, and the Open Compute project, put Rackspace at the forefront of these changes. They are key to its long term survival.

Disclosure: I am long GOOG.