Microsoft Corporation (NASDAQ:MSFT) wants to keep them in the fold. It is making Azure more appealing to big businesses by expanding its international presence. The company recently announced a Chinese launch, the first time that international cloud services will be offered to businesses and consumers in China. It also announced a simultaneous cloud expansion in Japan and Australia, where it will set up new data centers. To maintain cost competitiveness, the firm has also committed to match Amazon’s pricing.
Google Inc. (NASDAQ:GOOG) is also getting more involved in the cloud. Attempting to build its reputation as an enterprise and developer-focused provider, the company recently made its Google Inc. (NASDAQ:GOOG) Cloud Platform available. One of the platform’s advantages is its network speed. The data center connections are extremely fast. One reason is the company’s private distributed backbone between all the locations. This private network is much faster than the Internet, and the increased speed means lower customer pricing as more data can be processed in less time. To further lure the lucrative corporate client, the company has announced that its cloud service can be purchased with a new, lower-cost “Amazon-like” by-the-minute billing scheme. It has also announced that its Datastore product, an enterprise cloud data storage service, will have pricing reduced up to 25%.
Smaller players may be at risk
As tech behemoths wage war over the cloud, smaller firms such as Rackspace Hosting, Inc. (NYSE:RAX) could be at risk. A provider with about $1.4 billion in sales, it is the co-founder of OpenStack, an open cloud platform. The company is focused on a high-end market segment that demands, and is willing to pay for, strong support and management services. These customers usually wish to build their own private clouds and then connect them to the public Internet-based cloud. OpenStack was developed around this idea. But as Amazon kept adding services, cutting prices, and gaining more customers, big corporations found public cloud exclusivity and its price advantage an enticing alternative. That, and Microsoft Corporation (NASDAQ:MSFT) and Google aggressively entering the market, may soon put Rackspace Hosting, Inc. (NYSE:RAX) under some intense pressure.
While the company reported good first quarter results – net revenue rose 20% year-over-year to $362 million and adjusted cash earnings came in at around $65.1 million, a 23% increase – there were a couple of warning signs. First, the rate of revenue growth has slowed significantly. This quarter’s 20% gain is the latest in a string of lower amounts over the past year. Second, the company also trades at a fairly optimistic valuation. Based on estimated annual sales of $1.75 billion and cash earnings of $277 million, Rackspace sports a P/E of roughly 20, which may be a little too enthusiastic given the level of competition it is likely to face.
Conclusion
Cloud computing is an increasingly attractive proposition for large companies and industry giants are aggressively competing over these lucrative customers. This fight could have a significant effect on smaller cloud players and tech spending in general. While the clash over the cloud is likely to be very disruptive to those involved, it may also offer astute tech investors some nice, profitable opportunities.
The article The Clash in the Cloud: A Profitable Opportunity? originally appeared on Fool.com.
Bob Chandler has a short position in Rackspace Hosting. The Motley Fool recommends Amazon.com, Google, and Rackspace Hosting. The Motley Fool owns shares of Amazon.com, Google, and Microsoft. Bob is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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