When Scoble started at Rackspace (NYSE: RAX) on March 19, 2009 the stock was trading at $5.98 dollars. As of January 3, 2011 the stock was trading at $31.33 which represents an enormous 457% increase in stock appreciation. I know you’re thinking that the increase may be due to a lot of other reasons, but let’s look at it in slightly more detail....
...While we can’t with certainty state that there’s an association between Scoble’s arrival and the RAX’s superior stock performance, we can note that prior to Scoble’s arrival RAX maintained price parity with its competitors. Shortly after his arrival however, RAX broke from the pack and has maintained a superior return.
Mark is careful to caveat his response, noting there may be many other factors in play. But Mark's analysis implies to me that stock markets and investors pay more attention to social media people than financial analysts. I find that very hard to believe because financial analysts directly influence stock prices and they are not in the least bit social. They are paid to be as dispassionate as possible. Heck, even Goldman Sachs, which is at the center of the latest Facebook valuation chatter bans Facebook.
Spend any time speaking with these types and you quickly understand that what they want to know is: how are customers experiencing XYZ company's products? What does the forward product roadmap look like? How is the leadership making out? Are there any internal issues likely to impact leadership? The list goes on. I've never heard a financial analyst ask: 'So tell me, how is XYZ's social media strategy panning out?' If the day arrives it might make for some interesting banter. I know from discussions with some companies that they genuinely struggle with assembling socially related metrics in which the CFO might be interested so we might have to wait a while. That's my backdrop to this discussion.
Mark argues positively for Scoble's influence but that would not be possible without the socializing technology many of us take for granted. If there is an effect then it isn't just Scoble, it's what he is able to achieve as a result of the technology. In that analysis, the two are interdependent.
Now to what Scoble does. I have not spoken to him on this topic and would not do so. It would be imprudent to ask him whether he believes Mark's assertions to be true. It runs the risk of setting up the person for a fall and that would be unfair. That means in part I am guessing. Make of that what you will. But there is one thing I know and with which Scoble would likely agree. He can be a very good amplifier for driving attention about a new service among the Silicon Valley types. Onwards.
Scoble makes a ton of videos, often about startups. What do they need? Hosting. Where does Scoble work? A hosting company. What do many of the videos show? Rackspace advertising. I have no clue whether Scoble pitches for Rackspace when he meets these companies. I somehow can't see it as blatantly put as that. But I can envision a halo effect and I can imagine casual conversations between geeks moaning about this or that problem with a hosting provider. I've been through a fair few myself and have moaned about them all. And let's not forget that during his time at Microsoft, he was very good at promoting the company's innovations. But to make a direct causal relationship link of the kind Mark is implying requires a bit more work.
Whenever I hear that this or that technology delivers XYZ benefits I have to ask myself: where's the evidence? I know that our many years' history of implementing ERP has rarely produced a return that you can see measured on the bottom line. These days, such implementations are table stakes for running a business. I've pounded away at the Enterprise 2.0 and social media crowds demanding they show me the money - mostly to be greeted by a stony silence. I am very sure about this: the results are spotty. And they are darned difficult to measure in terms a CFO might understand.
Is Scoble any different? Does he have some sort of magic wand that acts as a clearly differentiated marketing magnet or influence mechanism upon which you can put a dollar value? When I read that in a quarterly earnings statement then I'll believe it though I sense there may be ways in which that can be objectively tested. That's what Mark has attempted to do in setting up his theory.
I know I give industry analysts a hard time and yes it is true that the rough split between spend coming from vendors compared to end user organizations is roughly $7 to $3 but I also know that analysts are only one point of influence. Despite the billions put into the analyst firms pockets, a Gartner Magic Quadrant, a product assessment or what have we will only be one point in a chain that might involve hundreds of decision points. Is Rackspace any different? Is it immune from the need to play inside the influence chain or is Scoble's claimed influence enough?
Enterprise demand was picking up for Rackspace as it grabs more wallet share.
The company’s launch of cloud services for Microsoft Windows has fueled demand.
Napier noted that Rackspace isn’t seeing any effects from Amazon Web Services and its recently announced free tier. In any case, Rackspace is looking to move upstream in cloud services and leave commodity infrastructure to Amazon.
Does that read like something you'd anticipate seeing discussed or mentioned in an enterprise conversation with Scoble? It may well happen but I'd be surprised to learn that he was part of an enterprise pitch team. But then it doesn't surprise me that Wall Street likes Rackspace. It is making a strong enterprise play and analysts see big bucks on the horizon. That's what they're banking upon.
In the same piece, Larry Dignan notes that Rackspace exceeded Wall Street's expectations for the quarter. That is the sort of thing that will carry weight with Wall Street. For example, around the same time, DataCenterStocks said of Rackspace:
The stock is near its 52-week high, and is likely to trade down at a multiple of any guidance or revenue disappointment. So if revenue comes in 1% lower than the expected $197 million, don't be surprised if the stock drops 5-10% after hours and on Tuesday. This has been happening with most data center stocks after they report, with exaggerated price swings down or up based on slight disappointments, or marginally better-than-expected results.
In other words, the data center stock market is highly volatile and prone to skittishness. But look also at what DataCenterStocks says is driving the price:
While y/y top line growth last quarter was in the low 20s, the company's current valuation of 74x annualized earnings is just above its 60% y/y growth in bottom line profitability. Continued reductions in its SG&A/Revenue ratio are essential to maintaining such a high valuation.
If you look at the stock chart Mark uses to illustrate his point, while you can certainly see the argument for the Scoble Effect, Rackspace stock price is not immune from skittishness.
For a good part of 2010, the stock was falling in price and only took off in August. It is only in the last four months the price really trended up and a good chunk of that came in September, with another strong push in late October through the end of the year. If you go one step further and draw the comparison with Akamai which is part of Marks illustration then a different pattern emerges. For the period mid-May to mid-September 2010, the two stocks were tracking more or less in lock step.
If Akamai has a high profile blogger/videographer like Scoble then I can't find them on Google. Any reason to explain what has been happening? Nothing that's obvious though I did notice Akamai has been dinged for losing out on a lawsuit. I also notice that during September, Rackspace was schmoozing the analyst fraternity off the back of it having:
That's important. Why? Where Mark's analysis falls apart is in understanding how a stock price works. While prices around earnings time tend to reflect the level of satisfaction with which analysts greet past results, longer term trends bake in the future. That's why a stock price can sometimes fall seemingly disproportionately to a minor hiccup. Can you successfully argue that Scoble's marketing smarts impact the future? I can't see how that is possible except as one piece of the Rackspace marketing pie.
Instead, I am much more impressed with the way Rackspace showcases customers and how it works hard to delight those same customers. Whenever I have discussions with customers about their IT landscape and data center thoughts, Rackspace's name is never very far from the conversation. Why? The company has established a solid reputation that customers are happy to talk about. As we have all known in this industry for a very long time, relationships drive enterprise sales harder than anything else. Get customers talking to one another and you're off to the races. Tick them off and you are in deep trouble.
My best example comes out of the SAP maintenance debacle of two years ago. Some of us were relentless in our bashing SAP at what we thought of as unfair price hikes. And yes, we got a lot of attention and yes, customers talked to us about their problems and yes, some of us were and remain active in negotiating those deals. But it was only when the large user groups stood up and said 'no' that SAP was truly forced into corrective action. I can take credit if I want for being part of a group prepared to expose the issues but the truth about the outcomes is far more nuanced.
Does Scoble's association with Rackspace add gravitas? In some circles and definitely among the startup community that clamors for his attention in the knowledge they'll get a traffic bump as a result. And yes I can see some likely indirect effects in part because of the explosion in development on the internet cloud. But even Scoble can't reach every one. And without putting too fine a point on it, his name never comes up in enterprise discussions where the big money deals emerge. You can counter by saying ah - but Rackspace is very good at serving the SME market, an area where Scoble plays in the startup space. Scoble will also counter by arguing that he does go into the enterprise space. He has told me that on a number of occasions. But that doesn't matter at the place where the money is talked about simply because of the many points of influence issue.
Has Rackspace outperformed its competitors? Unquestionably. Can we throw some credit Scoble's way? It would be extremely uncharitable to simply toss Mark's argument aside and quite frankly, if Scoble wasn't being effective then you can be sure he'd be out the door.
But what we should first be doing is assessing how well Rackspace executes its sales and service strategy in the marketplace. That's a much bigger thing than one man alone is capable of bringing to the table. That's not meant to take anything away from what Scoble does or the value he creates through videos as social objects. I just think we need be careful about ascribing bold causal relationships without looking at the whole picture. Because if Mark is right, then you'd have to also conclude that Rackspace must be wasting millions on its other marketing. But no. Check a search for 'cloud hosting' in Google. You see my point?