Comment by arihant | Hacker News Reader

Comment by arihant | Hacker News Reader

$3B over the next five years. Rackspace was worth around $4.6B in August with assets of around $1.6B. Assuming that Snap would require as big an infrastructure as Rackspace, then purchasing Rackspace for $4.6B was surely a better deal, because that's the amount their GC + AWS + Raw Hardware bill would cost, if they decide to build their own infra. Given how much AWS was earning a year back while still being massively profitable, these services cost a few hundred million a year to run at worst.

I have a strong feeling that this has a lot to do with available human capital to build and sustain these services. It even took Rackspace years to have a "Cloud" offering and it was essentially Slicehost with blings.

Come to think of it, it is around $4 per user, per year. With the way the landscape is with everything shifting to (live) videos, it probably is not that much an expenditure. Especially given that Snap will have several times the users in next 5 years, so the cost will look even less. That, and inflation.

Except that's entirely unrealistic as an actual business move. Coming up with $600m per year for operations, is very different for Snap versus coming up with $4.3 billion all at once to buy another business. This is especially true given Snap's (currently) anticipated revenue growth rate.

First, the people funding Snap - the people providing the capital to buy Rackspace - would not look well upon them trying to buy Rackspace. They'd think it was a huge distraction. Snap has some capital now, but they require that for operations, so they'd have to go out and raise a new $4.3 billion for the deal (and they'd suffer a painful dilution because investors would balk).

Second, you can replicate the useful (to Snap) infrastructure of Rackspace, at a fraction of the cost of buying the business as it was valued based on a relatively high multiple.

A year from now Snap should be able to hit at least $2 per user on a quarterly basis, with 200 million or more daily active users (both conservative numbers). At $400m quarterly in sales and growing, versus the ~$150m Google / Amazon costs (which might be lower in the early years of the deal?), it's a bad business move to take a 15% to 20% dilution hit to purchase the overvalued Rackspace business. That bad value ratio gets more and more lopsided if Snap keeps growing in the coming years.

Buying Rackspace to run your infrastructure on? That makes no sense. Customers are using those servers, you'd have to kick them all off in order to reprovision them for your own use.

Otherwise, you'd still have to buy new hardware under the Rackspace moniker.

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