Original URL: http://www.theregister.co.uk/2008/06/20/microsoft_rackable_buy/

Microsoft should buy Rackable instead of building custom computers

Out-acquiring Google

By Ashlee Vance

Posted in Servers, 20th June 2008 19:07 GMT

Comment We're in the midst of some very strange times. An online book seller owns the leading utility computing service. An advertising company manufactures its own servers and switches. And spots in rural America best known for being, well, rural are turning into technology heavyweights because they have access to cheap power and generous taxpayers.

Given such circumstances, it seems only sane to expect a few peculiar acquisitions to take place in the coming months. After all, the characteristics that once separated a software company from a hardware company or an online store from a computing provider have started to vanish.

Were Microsoft a hard-charging, forward-thinking company rather than a reactive laggard, it might choose to address this new reality by purchasing Rackable Systems of all things. It may sound crazy, but here's why it's not.

Last month, Microsoft's infrastructure chief Debra Chrapaty gave a speech which failed to attract the attention it deserved. Speaking at the Microsoft Management Summit in Las Vegas, she outlined the company's aggressive plans to build out its computing systems. Chrapaty, during the speech, went so far as to confirm that Microsoft will start building its own systems a la Google.

"We're also doing some other innovations," she said. "You know, when you think about the servers, you can just design servers that use less power, and so we're doing that. We're working on our own server design, our own motherboard design, chip design."

It's hard to tell how seriously we're meant to take that statement.

For one, it's more than vague, since Chrapaty is claiming that Microsoft will do its own chip designs. We doubt that Redmond plans to build a chip fabrication plant anytime soon, so we think she just meant that Microsoft is incorporating low-power processors into its custom motherboards.

Beyond that, however, there's just no indication that Microsoft is actually building its own gear. The most radical infrastructure thing Microsoft has done to date is to go the whole hog with the data center-in- a-container idea. Microsoft is in the middle of building a massive data center in Chicago, which will feature hundreds of the containers. Our sources indicate that Microsoft has no intention of filling these containers with its own systems. Instead, it's asking the likes of Rackable and Dell to craft very demanding boxes.

These statements seem to reflect Microsoft's tendency to talk big and deliver small. (Do we really need to point you at Vista?)

So, while it has hopes of building its own systems to compete with Google, it would likely take the company years and years to establish the necessary internal systems to produce hardware.

Microsoft could, however, speed up this whole process by acquiring Rackable, which stands as the leading cloud/utility hardware maker around and which already sells tens of thousands of servers to Microsoft.

Rack 'Em Up

Under previous management, Rackable received and then turned down an acquisition offer from Dell. That was a huge mistake since Rackable's share price was almost triple its current level. In addition, Dell along with all of the major hardware makers have since moved on with their own cloud/utility computing designs. This leaves Rackable in an awkward position. Its natural acquirers have disappeared. It will need an unnatural act to strike it rich.

Rackable is expected to release new systems any day now, and our sources indicate that the hardware will put the stuff being pimped by the Tier 1s to shame. The Silicon Valley-based company offers the most energy efficient, balanced servers of anyone and has, by most accounts, the top data center in a container design, which should only improve with the new servers.

In addition, Rackable has always run on a build-to-order model. The company is flexible enough and smart enough to cater to a customer's individual needs, unlike the big boys which must make drastic compromises to serve as broad a set of customers as possible.

So why not have Microsoft commit that unnatural act and buy the server house? Rackable's market capitalization stands at just $417m, as of this writing. Microsoft could afford to pay a 100 per cent premium and grab Rackable for $1bn. That's just two data centers' worth of money at the going $500m per center rate.

With Rackable on its side, Microsoft would have cutting-edge server designs, potentially capable of saving the company millions of dollars in power costs every year. It would also have the best container team going. And, most importantly, Microsoft would gain top data center talent with the skills to help it keep pace with Google.

Build Versus Buy

The decision as to how far you're willing to go to mimic Google is a tough one.

The public has no idea how effective Google's data center operations really are at reducing power consumption. It could well be the case that the time and money Google spends fiddling with its own systems outweigh the gains from a reduced power bill.

In addition, Google's go-it-alone strategy is rubbing a number of infrastructure companies the wrong way. Only a handful of top providers exist for cooling, power and data center infrastructure systems. Our sources tell us that Google's lofty demands and penny pinching have irked many of these providers to the point that Google is finding it difficult to recruit partners for new data center build outs.

Google must also presumably eat the costs associated with component price fluctuations, while other service providers that buy gear from the Tier 1s will benefit from static prices, as the server vendor itself eats the higher component costs.

All that said, Microsoft must consider the notion that Google does achieve significant cost savings through the bespoke approach and those cost savings place Google in a better competitive position. If that's the case, then Google will only increase its lead over rivals in the coming years as service providers buy millions instead of thousands of servers.

The strongest argument against building homegrown systems is that it's not a service provider's strength. Companies usually fail when they stray too far from their core business.

By purchasing Rackable, Microsoft would turn building servers into a core business and immediately gain a leg up on all the other service providers except for Google.

Of course, there's room for the likes of Amazon, Yahoo! and others to eye Rackable as well. These service providers have all bought large amounts of systems from Rackable and need every competitive edge they can get. Even when you're pretty darn good at what you do, you can pay to get better through talent. Just ask Apple, which bought PA Semi's chip brains for $300m to give the iPhone an added kick.

And the need to remain vigilant against Google is crucial. The ad broker has demonstrated a willingness to overpay for companies where necessary just to move faster than the competition. Through the PeakStream acquisition, Google also showed that it will purchase a tool with potential for industry-wide application just so its engineers can play around with the technology in-house. That has to intimidate rivals.

Given that Chrapaty has already confirmed Microsoft's plans to require custom designs from hardware makers, it would appear that the bespoke play is well underway. But, rather than being a sloth-like follower, Microsoft has the chance to shift from dabbling with custom hardware to grabbing the idea with full force and actually putting pressure on competitors. All it would take is a large check - one Microsoft can write without even noticing the missing money. And, it could be the case that Microsoft saves $1bn in data center costs just by having the Rackable team in-house to aid with more efficient designs at the centers already being built.

A software company buying a hardware maker? Yes, that's what it has come to in this day and age. Those old lines of demarcation that defined the last major infrastructure boom are no longer relevant. ®

Bootnote

Many people will argue that Microsoft and other large service providers can just play the major vendors off each other and gets massive amounts of very low cost systems. Keep in mind, however, that this could leave the rivals one to two generations behind Google or a company that's willing to take a more radical approach.

Even with their more dramatic cloud/utility systems, the major server vendors make certain compromises and are not matching what Rackable or Google, presumably, can do today. Microsoft is talking about getting 1,200 watts per square foot out of its new data centers. We doubt that IBM's iDataPlex system, for example, will get Microsoft to that point. But a 96 per cent efficient custom power supply from Rackable and some super, super-dense systems might.

At some point, we're talking about cost versus innovation and competitiveness and where you make those trade-offs. If Microsoft wants to dominate the next wave of computing, it had better push the envelope rather than do what everyone else is doing.