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Rackspace Follows Rivals with Cloud Price Cuts

02/22/2013 | 12:55pm US/Eastern
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--Move seen as reversal of strategy

--Cloud competitors cut prices last year

--Shares drop amid revenue-growth concerns

(Adds details throughout on rivals' cost cuts, Rackspace earnings, executive quote.)

 
   By Drew FitzGerald 
 

Rackspace Hosting Inc. (>> Rackspace Hosting, Inc.) Friday bowed to pressure from price-cutting rivals by slashing rates for cloud-computing services by as much as a third, tweaking its strategy as competition in the sector intensifies.

The San Antonio, Texas, company said prices for bandwidth and content delivery services, which let users load Web pages faster, will drop 33%, while products in its open cloud product portfolio fall under a new, competitively tiered pricing structure. Rackspace is starting with lower prices for its Cloud Files object storage service, with cuts for other products expected in the coming weeks.

The price cuts caught some investors off guard, sending shares to a six-month low.

"They've always said they don't compete on price," Pacific Crest analyst Michael Bowen said. "It's a change in pricing strategy."

Shares recently fell 3.6% at $53.35 as the price cuts revived worries about the pace of sales growth this year, a concern that erased 20% of Rackspace's value earlier this month, when revenue from upgrades by existing customers slowed to its lowest rate since 2010. The stock is off about 0.7% over the past 12 months, erasing its 73% rise in 2012.

Rackspace has seen strong profit growth in recent years as expanding Internet use drives demand for its Web-hosting services. The company has posted particularly strong revenue growth in its public cloud business, which allows companies to rent computing resources from a shared set of machines.

Friday's move follows similar actions by rival Amazon.com Inc. (>> Amazon.com, Inc.), which dominates the so-called public cloud market for rented computing services. The retailer's business-focused Amazon Web Services unit recently said it dropped prices 25 times since its 2006 launch.

Other technology companies attempting to chip away at Amazon's lead have responded with similar cuts. Google Inc. (>> Google Inc) last fall dropped its computing-storage prices by about 20%, to a starting price of 9.5 cents a month for each gigabyte. Amazon matched that starting price, and Google responded with another cut, to 8.5 cents per gigabyte. Microsoft Corp.'s (>> Microsoft Corporation) Azure cloud service followed a few days later with cost cuts of its own.

"I don't believe Rackspace is going to try to join into that behavior, but they clearly thought pricing was an impediment here," Mr. Bowen said.

Rackspace's volume discounts unveiled Friday range from 10 cents per gigabyte per month for the first terabyte of storage to 7.5 cents past 524 terabytes and lower for even larger storage levels.

Company executives often distinguish their service-focused business model from competitors' storage and computing work and have said Rackspace competes with peers on the basis of its customer support more than on price.

"There is a lot of distance between what they're doing and we're doing," Chief Technology Officer John Engates told Dow Jones in a December interview. "Amazon ... they kind of wait for you to call them for support, but Rackspace is interested in the day-to-day management."

--Saabira Chaudhuri, Shira Ovide, Greg Bensinger and Amir Efrati contributed to this article.

-Write to Drew FitzGerald at andrew.fitzgerald@dowjones.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

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