Equinix and RackSpace Follow the Cloud Computing Trend

The advent of efficient and groundbreaking models for organizing and managing networks has radically transformed the way businesses and individual consumers manage their operations, play and connect with each other on the web.

Cloud computing is a relatively new trend that combines the power of internet computing in huge structures referred to as server farms. Big Data defines this technological effort in terms of management of the ever-rising amount of information all over the world.

The amalgamation of these trends presents profitable opportunities to tech companies, resulting in an increase in demand for hosted data centers, networking tools and software; it reduces costs and increases operational efficiency.

According to Rackspace (RAX) CEO Lanham Napier, “The technology industry is in the early rounds of a massive secular shift that will change the way businesses consume IT. Massive technology disruptions like this create opportunities for companies to seize the moment, disrupt the status quo, and lead to revolution. We believe Rackspace faces one of those opportunities and that we are in a position to lead this revolution.”

IBD’s Internet networking solutions industry group houses Rackspace and 29 other companies, a large number of which are based on cloud services, with a ranking of 57 out of 197. The increase in index has been recorded at 36%, which is the sixth-best increase across all the industry groups.

This gain is largely attributable to Equinix (EQIX), Rackspace Hosting, network management software firm SolarWinds (SWI) and website publishing and marketing company Web.com Group (WWWW).

Business

It has been estimated by IDC that cloud spending will touch the $40 billion mark globally this year, and $99 billion by 2016. While Gartner estimates the spending to be $58 billion this year and $117 billion by 2016.

This presents business opportunities to data center operators including Rackspace and Interxion (INXN), as well as companies like F5 Networks (FFIV) and Akamai Technologies (AKAM) that improve the application, video and other online data delivery.

In the meantime, the need for network servers is being reduced as a result of virtualization technologies, thus reducing the cost of cloud computing, increasing profitability as well as the customer base.

According to Cisco, the worldwide internet data traffic is expected to increase from 43.4 exabytes monthly this year to 110.3 exabytes a month by 2016. (Exabyte = 1 billion gigabytes).

Companies like SolarWinds and Infoblox (BLOX) continuously need to update their services in order to accommodate the increasing traffic levels. This rise in traffic is largely attributable to mobile devices, such as tablets and smartphones, resulting in rapid expansion of the cloud industry.

“IT services (are) a sector that grows at GDP plus 1% a year and yet we are seeing the data center services companies like Equinix and Rackspace growing around 20% a year,” says Evercore Partners analyst Jonathan Schildkraut. “What’s going on is a major paradigm shift in the way that companies purchase, manage and access IT resources. And these companies are leaders in this paradigm change.”

Market

Competition among companies is based upon provision of services to niche markets, lower prices or service differentiation to gain a competitive edge. For example, Equinix offers high-speed data centers that cater to multiple customers at a time, and are situated near main and crucial markets, with customers including Apple (AAPL), AT&T (T), BT (BT) and IBM (IBM).

Web.com is another company catering to small businesses, with over 3 million customers utilizing its web hosting services, domain name registration, online marketing and other similar services. Web.com’s customers are usually those individuals who do not have enough time to become proficient at SEO, social media use and web-based marketing, thus they rely on experts such as Web.com to build a strong online presence for them.

The internet in quite huge, with no single industry consisting of all the pioneering companies that can provide all the services. Companies such as Cisco Systems (CSCO) and Juniper Networks (JNPR) are included in the group of computer networking companies.

Climate

A big advantage of cloud computing is that it allows companies to cut back their costs because they can pay for it as a service.

“IT budgets have been relatively flat and chief information officers have been tasked with getting the same productivity out of the same sort of budgets,” says Benchmark Co. analyst James Dobson. “One way to do that is to look for lower-cost alternatives, and outsourcing through co-location or cloud and managed hosting (are among) the ways they’ve been able to do it.”

SolarWinds has attracted a lot of customers by providing inexpensive network and server monitoring software. “These guys have a very low-cost business model,” says JG Capital analyst Jeff Gaggin. “They’re beating companies like CA and BMC on a regular basis.”

Even though SolarWinds does not offer all the services offered by competitors, its price is quite low, which gives it an edge over its rivals. “It allows more affordable IT service management solutions,” Gaggin said.

Another advantage of SolarWinds is that it uses low-cost sales representatives, and directs its marketing strategy towards online advertising where customers explore topics related to IT management.

Technology

RackSpace is planning to take the IT by storm with its open-source cloud operating system, which is based on OpenStack technology. Open-source programs are not the private property of one entity, that is, they are not copyrighted. Rather, they are owned by public and undergo continuous development.

RackSpace is offering its technology as an alternative to competitors’ products, such as those of Amazon (AMZN) Web Services. Companies such as Internap (INAP) have also joined the league and are competing against RackSpace, which hopes to achieve product differentiation through excellent customer service, according to Napier.

Based in San Antonio, RackSpace caters to more than 190,000 customers globally.

Outlook

IDC estimates reveal that public cloud IT spending will increase by approximately 26% over a time span of next five years, that is five times the overall IT industry growth.

It is also projected that U.S. will continue to be the biggest market for cloud service, after which it will be Western Europe and Asia-Pacific region, except Japan. The most rapid growth in cloud services is expected to be in the developing markets and economies, i.e. China, India and Indonesia.

Cisco estimates that there will be a threefold increase in global Internet data traffic within the next five years, while annual growth is expected to be 29% during these years.

According to Dobson, demand for cloud computing is likely to increase at a steady rate, which will increase the capital investment in this sector of technology as well.

“The main driver is the digitization of the economy,” he says, “and we think that’s in its early stages.”