I don't think rackspace is worried about "some muslim", I think they're worried about angry Americans.
The military, the secretary of state, and many others have pointed out how this (particular) action is likely to lead to more violence directed at the troops overseas.
While the troops are fighting to create some peace so they can get the hell out, you have idiots feeding the fire back home.
The church can always find another hosting provider, but there's no reason rackspace has to provide a platform.
In the same manner, if you start spouting hate speech on slashdot, odds are the moderators are going to close your account or ban your ip.
Suppressing freedom of speech would require the government to take some action.
eg.
"In Afghanistan, Abdul Hadi Rostaqi, a member of the cleric council in the country's largely peaceful Balkh province, said Thursday that if the burning goes ahead, "a big protest will be held" in the provincial capital Mazar-i-Sharif next Monday. NATO-led troops stationed in the city — one of the country's main centers of the Islamic teaching — would be the primary target." - Mitch Stacy, Associated Press