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In its latest earnings report, VMware had a 1% decline in the company's compute bookings and a 10% decline in compute license bookings. Put in layman's terms, VMware growth has stunted and the company has experienced a decrease in revenue from vSphere, suggesting a decline in the product suite's popularity.
Since vSphere serves as the cornerstone of VMware's business model, the findings of this report have many wondering whether we've reached peak VMware and, more importantly, how this could have come to pass.
VMware has been around for a long time. I was fortunate enough to get on the bandwagon early, back in 2000 when I heard about Workstation and plans to run servers in virtual machines. For the past 10 years, I've specialized in virtualization while many of my other technical skills have faded. It's been a long and fun ride, and I've had the opportunity to watch VMware go from being a curiosity to a cool new technology and eventually to a game changer in the way data centers are operated. Having seen some previous waves of innovation, I initially estimated spending a few years familiarizing myself with VMware software, but I never anticipated dedicating 10 years to one company's products. I imagine there are a few people in the industry with nearly a decade's worth of experience who never knew life before vSphere. Now we must face the fact that VMware growth may have reached its zenith as an innovator and is likely to see a continued decline in the coming future.
The rise and fall of vSphere's growth
One big question is: What drove VMware's success and why has it peaked? Since its release, vSphere has rapidly gained popularity in data centers due to its cost saving functionality. VSphere's continued revenue growth is dependent upon the creation of new data centers and its implementation in older data centers that have not yet converted to virtualization.
VSphere continues to perform well in regions that were initially hesitant to embrace virtualization, but are now adopting virtualization at unprecedented rates. These regions, particularly parts of Asia, have plenty of data centers full of physical servers that can benefit from virtualization. I predict that these regions will experience a rapid rollout of VMware virtualization in existing data centers over the next few years followed by a stall in vSphere growth. The fact of the matter is that the world is quickly running out of data centers to convert to virtualization.
Another factor affecting VMware's growth is the use of public cloud. The largest public clouds do not use VMware products, meaning users who make the move to public cloud have less of a need for vSphere. Equally problematic for VMware is the evolution of Google's Infrastructure for Everyone Else, an open source approach for launching applications quickly and at scale. Enterprises are building on-premises infrastructures that use open source software to deliver private cloud services. This includes efforts like the Intel Cloud for All initiative, which enables enterprise customers to adopt cloud scale architectures and methodologies without immense costs. Over time, more organizations will likely retire their massive VMware licenses in favor of open source cloud platforms.
Finally, VMware is facing stiff competition in the virtualization market. Kernel-based Virtual Machine (KVM) has long been a favorite of cloud providers due to its free availability. Recently, KVM offerings such as Scale Computing and the Nutanix Acropolis hypervisor have made inroads into conventional on-premises IT. And let's not forget that Microsoft has a horse in this race. Early versions of Hyper-V may have been lacking in features, but recent releases have delivered a product that rivals -- and possibly even surpasses -- vSphere.
VMware earns revenue from new ventures
If vSphere is in a steady state of decline, what has caused VMware revenue to continue to climb by over 6% each year? VMware has been redirecting its focus to management and automation products for some time now, and it's paying off in dividends.
According to the same earnings report, although vSphere revenue is down, VSAN and NSX revenues are up by 200% and 100%, respectively. Granted, these products started at very low numbers last year, so these percentage increases may be misleading, but they're promising nonetheless. VMware has also said end-user computing (EUC) played a role in many of their largest deals. My concern with this is that VSAN only operates on top of vSphere -- as do VMware's main EUC products -- and NSX is most often deployed with vSphere. So if vSphere is declining, how are these products going to keep VMware afloat?
It's my belief that these other products were developed to help protect vSphere revenue, but if this is the case, it's an ineffective tactic. Now that we're aware of the decrease in vSphere revenue, it seems obvious that VMware is nearing its peak, if it hasn't reached it already.
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