Interview: Rackspace Co-chairman Morris Miller

Morris Miller joined Rackspace Managed Hosting in 1998 as chief operating officer, and now serves as Managing Director as well as co-chairman along with Graham Weston. Miller's primary focus is on corporate strategy, business development and M&A activity. He recently shared his thinking on key issue affecting Rackspace and the hosting industry.

Q: Rackspace considered going public prior to the downturn in the tech market. Is Rackspace still considering an IPO? What are the key factors for you in deciding whether and when to go public?

A: Fortunately, we are profitable and don't need to go public in order to fund our growth. Instead of focusing on an IPO, we concentrate on building our business for the long haul and creating the best hosting brand in the world. That said, an IPO is something we may consider in the future.

Q: Rackspace is rolling out a new virtual hosting platform as part of an effort to attract more hosting resellers. What's new, and how will this differ from the options available to resellers through your current offerings?

A: This reseller offering was born from our roots in the SME market. As Rackspace grew and matured, our managed hosting offering became more robust than the need of the traditional reseller. We've spoken with many of our reseller customers and involved them in the development of the ideal turnkey reseller engine. We believe we have come up with a customized offering that better suits the needs of our reseller customers. Look for a launch of our reseller offering in Q2 2004.

Q: Resellers offering shared hosting are grappling with tough competition on pricing. What do you see happening with hosting prices going forward? And how are these trends affecting your reseller customers?

A: Rackspace's core managed hosting offer is a service differentiated by our Fanatical Support philosophy. Our customers realize the value of service and are willing to pay a fair price for it. So, overall we have not seen price erosion that we've heard about in the commodity spaces. We believe the same thing will happen in the shared hosting space. Customers will always pay a fair price premium for a better or richer service experience.

Q: Rackspace has one of the largest concentrations of machines running Red Hat Linux anywhere on the Internet. What is your plan with respect to Red Hat's changes in support and licensing?

A: In July of 2003, Rackspace became the first hosting provider to offer Red Hat Enterprise Server and Advanced Server. We view Red Hat as the standard on Linux and their new strategy does not appear to change any of the benefits provided by the operating system. However, we will continue to monitor how ISVs, application developers and other users respond to the new licensing structure.

Q: The hosting industry has seen a huge consolidation, with many assets available through distressed sales, yet Rackspace has not acquired other providers. Why not?

A: We've looked at a number of providers that wanted to sell their assets and customers at distressed prices. However, we continually find that building our business organically has simply been more cost effective and creates happier customers. We win customers one at a time. We work hard so that customers choose us when they have a new project or expansion to deploy. And this will be more effective than taking on distressed assets with unhappy customers.

Q: Rackspace has historically focused on the small to medium sized customer. You launched an Intensive Hosting division to pursue larger customers. How has this initiative gone thus far, and how does this client base fit into Rackspace's business down the line?

A: Rackspace launched its Intensive Hosting division for Microsoft platforms 18 months ago in June of 2002. As a result, our enterprise growth has been phenomenal. Enterprise customers see the value in our Fanatical Support and require the proactive management Intensive Hosting provides to them. Today, Intensive Hosting boasts blue chips like Hershey's Foods, The Scotts Company and SANYO North America.

Q: Your emphasis on support places a premium on skilled labor. Many IT providers see offshore staffing as a key strategy in containing costs. What is Rackspace's view on this issue, and how is it affecting the businesses in which you compete?

A: Offshore outsourcing of support staff is clearly a big trend in the industry - many are doing it to keep down costs. And it's not a bad idea for solid product companies like Dell, Palm, Cisco, etc, where the service is secondary to the product. However, Rackspace has no plans to outsource its support overseas. We are a service company and want to control the customer's experience with us to ensure it is great - every time.

Q: Last August you launched security products designed to combat Distributed Denial of Service attacks. As worms, viruses and DDoS strategies proliferate, what do you see as the key challenges and opportunities for Rackspace on the security front?

A: The Internet is a dangerous place. And it is going to get worse. We feel that security is a huge customer need that is going unaddressed by most managed hosting providers. Rackspace has dedicated vast resources to the development of a robust security program and we are very proud of our offering. It will be a challenge for IT shops without the internal security expertise to defend themselves against the myriad of threats that we see daily in managing thousands of servers and millions of web sites. We plan to be very aggressive in launching new, cutting edge and comprehensive security services to help protect our customers.

Q: Is the consolidation in the hosting industry nearly done, or is there more to come? How has consolidation affected Rackspace's competitive position?

A: Very few companies in the web hosting space have completed successful acquisitions. While assimilating companies and assets is always difficult, it seems more so in the managed hosting space because changes can deeply affect the customer. However, I believe that more acquisitions will continue throughout 2004, especially in the SMB area of the hosting space. At Rackspace, we've found that it is much more effective to build our offer, service and customer base one customer at a time. There's no substitute for organic growth.

Q: What are the trends that you see having the most impact on your business in the next year, pro or con?

A: Security is a critical piece that needs to evolve continually and will be a big part of our strategy next year. We also believe that the concept of utility computing is alive. Rackspace's easily scalable hosting offering captures the essence of utility computing and we plan to enhance and communicate the true on-demand nature of our service more in the future.

I see a continued rise of the Internet. Broadband usage is up and the cost of building applications is down - which will increase the demand for web hosting. Despite the increased demand, I still believe there is too much confusion in the space regarding the number of players, their financial viability and overall capabilities. The market still struggles to provide clear choices to customers, and the ability to do so is likely still a few years away.