How Rackspace Beats the Behemoths

At a former mall in San Antonio, near escalators that used to shuttle Mervyns shoppers between floors, Rackspace Hosting (RAX) Chairman Graham Weston explains a phrase his 3,500 employees have practically tattooed to their brains: "fanatical support." That's how Weston sees Rackspace beating larger, better-known competitors such as (AMZN) in the business of hosting others' websites and applications on servers around the world.

The 12-year-old company had a decade of near-death experiences, including a disastrous initial public offering during the 2008 financial crisis. (Its stock fell almost 20 percent on the first day of trading.) Since 2007, Rackspace's sales have grown by an average of 30 percent every year, and analysts expect net income to climb 49 percent this year, to almost $70 million. Wall Street has caught on: Rackspace shares, up almost tenfold since early 2009, are trading near an all-time high of $46 per share, valuing the company at more than $5.6 billion. Customers include 40 percent of the top U.S. companies by revenues.

Weston, 47, is an atypical tech entrepreneur. Raised on a south Texas cattle ranch, he used his penchant for finding value in distressed properties to amass a real estate empire that includes San Antonio's tallest office building. He lives on lakeside property purchased out of bankruptcy, and resides there with his wife and three kids in a double-wide trailer bought for $50,000 in a foreclosure sale. Weston built up Rackspace's infrastructure using the same skills: When the dot-com bubble burst, he snapped up three empty data centers for pennies on the dollar. To accommodate the company's growth, Weston paid $32.7 million for the abandoned Windsor Park Mall, which has 1.2 million square feet of space.

Real estate acumen won't help much with Rackspace's biggest challenges, namely, wooing in-demand programmers and stretching its relatively small cash hoard ($134 million, vs. Amazon's $8.76 billion) in a capital-intensive business. Weston and his chief executive officer, Lanham Napier, see customer service as Rackspace's key competitive advantage. Employees have been known to have pizza delivered to customers who are working late or sing Happy Birthday to You via speakerphone. The highest internal award for employees is a straitjacket with the words "Customer service Fanatic" on the front. "It's man vs. machine," says Weston of the difference between Rackspace and its rivals. "We have to become one of the most trusted people in our customers' lives."

Rackspace says the contrast is most apparent when disaster strikes. When Amazon's cloud-hosting service crashed in April, some found the Seattle company's response lacking. "They could've communicated better while it was happening," says Christopher Ahlberg, who received a two-week credit and an apology letter from Amazon when his data analysis startup, Recorded Future, went down. An Amazon spokeswoman says the company "identified improvements that need to be made in our customer communications" and is now implementing them.

When Rackspace lost power in 2007, employees called thousands of customers to apologize, explain the situation, and promise refunds. "What separates the men from the boys in this world is how they communicate," says Sean Andersen, director of interactive services for Six Flags Entertainment (SIX) and a Rackspace customer who says he was wholly satisfied with the company's response to the 2007 outage.

Rackspace is so insistent on customer experience as a competitive advantage that it's willing to give away its technology. The company spent three years building software tools to make it easier to set up cloud-storage systems. Last year it made the source code freely available as part of a project called OpenStack. It's a big risk: Dell (DELL) and Citrix Systems (CTXS) have said they will be selling systems based on OpenStack that could compete with Rackspace's offerings. Yet managing those systems still requires expertise, according to Lew Moorman, Rackspace's chief strategy officer and the president of its cloud unit. The company's betting that OpenStack users will hire Rackspace to do it for them. "Ultimately, we want to make it a better experience and not a technology game," Moorman says. "We think we're going to do it better than others."

The bottom line: Its stock near an all-time high, Rackspace is giving away software in hopes of wooing new customers to its suite of services.

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