Sunday, August 10, 2008

Why dell / Rackspace is a bad idea

I just received this from an anonymous source. I appear to not be the first to consider the idea.
The Dell / Rackspace tie up could be very difficult for many reasons:
- The two cultures could not be more opposite. Dell is very structured as any multi billion company must be and focused on financial performance. Rackspace is focused on fanatical support at all costs. The financial focus and the fanatical support focus would likely clash hard.

- Rackspace excels at providing services and thinks and breathes from a services perspective everyday. Dell which provides many services, is probably still best at providing products which produce revenue today. Dell revenue expectations would likely reward product revenue which is recognized today, not services revenue which is recognized over time. A product driven organization like Dell may not have the patience it takes for a services organization like Rackspace to ramp revenue over time.

- Will Dell be more interested in figuring out how a hosting business can help them drive more box sales, or will they see it as a new revenue source to grow. If Dell takes the former position, they will likely suboptimize the hosting business in order to drive box sales, as opposed to driving the hosting business as a new revenue source in its own right.

- Keep in mind that Dell had a hosting business before called Dell Hosting which for whatever reason was sold. Based on that experience, Dell may not have much interest in covering that ground again.

- Rackspace is very capital intensive and according to internet reports is looking to spend $335 million this year on equipment, data centers, and office space - far more than the $187 million they just raised in the IPO by the way, but that is a different issue. As they continue to grow, that is likely just a drop in the bucket compared to future capex needs for expanded data center and equipment needs globally. Dell is really more of an assembler and is not very capital intensive. By all accounts, Dell is very careful when it does spend capital and does so sparingly. This difference in capital spending philosophy could drive lots of friction.

- Despite the current vendor/customer relationship between the two, how good is the relationship? HP, NetApp and others have made joint announcements with Rackspace in the recent past. Maybe this means nothing, but if the Dell relationship was great, seems like those announcements would have been with Dell, not other vendors.

Seems like a good idea on the surface, but could be full of trouble.

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