As Rackspace Battled, Then Befriended Amazon, San Antonio Tech Matured

San Antonio—The Alamo city has never received much credit for its work in technology. One local executive likes to say that San Antonio works on the plumbing of the Internet.

Compared to Austin, a renowned tech capital about 90 miles to the north of San Antonio, that description seems pretty accurate. Austin holds hip tech conferences, such as South by Southwest, which combine business and art. Flashy brand-name tech companies, from Facebook to Dell, have offices in the state capital, too.

Meanwhile, San Antonio’s work in tech has always been a bit less sexy. Cybersecurity has been a major employer in the Alamo city, but that work doesn’t get much national recognition because many companies work quietly as military or other government contractors. Rackspace has been a bright star in the San Antonio tech economy, but as a business that helps other businesses manage and store data, it has still never gotten a huge amount of attention.

Even so, Rackspace is one of the primary reasons why things are beginning to change in San Antonio. Over the last six years, more money is being invested in growing a startup scene in the city. Rackspace, and people who once worked there, have been primary drivers in that shift. Former Rackspace executives founded a co-working space, Geekdom, in 2011, which has helped spark an entrepreneurial spirit in the city.

Investment firms have started opening their doors, including Geekdom Fund in 2013, and Scaleworks in 2015. Scaleworks was co-founded by a former president of Rackspace, Lew Moorman.

Notably, challenges to Rackspace’s core business—specifically, fierce competition from behemoth Amazon—actually contributed to the growth of the startup culture in San Antonio. Rackspace’s effort to survive a shifting tide in its primary business helped at least one executive find his current path at a startup (more on that below).

As early as 2008, Rackspace knew that competition was coming from Internet companies like Microsoft and Amazon, which were investing in data centers and cloud computing.

Still, things were going well at Rackspace. It was growing, having doubled its revenue during each of the previous three years. The company completed an IPO in 2008, too, and though the public offering performed poorly, it helped bring more national attention. Growth at Rackspace continued in the following years despite a recession, according to public regulatory filings. The company was able to keep its business strong because of a customer service offering Rackspace calls “fanatical support”—expert engineers, programmers, and customer service reps that help Rackspace’s cloud computing clients with anything they need. By 2011, Rackspace reported its first year of more than $1 billion in revenue.

And yet Amazon and Microsoft lurked in the background, building their cloud computing businesses. “We will continue to compete more directly with Amazon, Microsoft, IBM and Google as cloud computing services become increasingly more virtualized,” Rackspace wrote in a 2012 filing with the U.S. Securities and Exchange Commission.

The market did indeed shift to virtualized cloud computing, and quickly. Amazon Web Services reported $3.1 billion in sales in 2013, and that number jumped to $7.2 billion by 2015. (For what it’s worth, that trend has continued: AWS reported $17.5 billion in 2017.) Meanwhile, Rackspace’s seemingly ever-present revenue growth was slowing down. Revenue increased by 31.3 percent to more than $1 billion in 2011 from the previous year; by 2015, that annual increase was only 11.5 percent.

The indication was that the customers who once bought Rackspace’s dedicated hosting and cloud computing services were indeed switching over to become customers of Amazon, Microsoft, and others who were offering scale, ease, and in some cases cheaper services. Rackspace realized that it may not be able to directly compete with AWS and Microsoft’s Azure, so it made a dramatic move—it decided it would try to work with its longtime competitors.

“How do you go build a relationship with someone you are competing against in a competitive market?” says Chris Cochran, who was an executive vice president and general manager at Rackspace. He worked with the company from 2008 to 2016, including in corporate strategy during this transition. “How do you build services and technology in a market that elevate what Rackspace does, but also expose all the magic that people are picking AWS for?”

The answer, Cochran says, was customer service. … Next Page »

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David Holley is Xconomy's national correspondent based in Austin, TX. You can reach him at dholley@xconomy.com Follow @xconholley

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