VMware hits powerful headwinds in effort to diversify

VMware made its name in server virtualization, but diversifying is tricky, as the company joins an endless parade of smart, deep-pocketed challengers with their own designs on data center dominance.

By Bridget Botelho, Senior News Writer

When VMware first started selling server virtualization products more than a decade ago, it pretty much owned the game. The company built a good -- albeit expensive -- product for data centers and an inexpensive, then free, product for smaller workloads.

For IT managers, the fact that it offered tremendous ROI for not much effort made virtualizing servers the hottest thing around.

As big competitors, such as Microsoft, started breathing down VMware's neck, the company began diversifying into different virtualization market segments. Though it's still early days,VMware Inc. as seen mixed success. The Palo Alto, Calif.-based company hasn't gotten the same traction with virtual desktop technology as it has with server virtualization, and VMware's other main focus, cloud computing, is mainly just an academic discussion within the vast majority of IT shops.

VMware's VDI strategy
VMware has worked hard to get its virtual desktop infrastructure (VDI) product, VMware View, in front of VMware shops. But this nascent market segment is filled with hot startups and competing virtual desktop approaches. One notable slip-up from VMware recently has given its toughest competitor, Citrix Systems Inc., a big advantage.

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VMware's VDI strategy went awry earlier this year when the company quietly pulled the RTO Software profile management feature from View 4.5 beta 2. Without profile management, VMware View cannot be considered an "enterprise ready" VDI product, experts said. The company also pushed back the product's general availability date from July to September, around the time of the company's annual confab, VMworld 2010, in San Francisco.

The two-month delay of View 4.5 may not have a long-term impact on the budding desktop virtualization market, but it has meant losing the race to be the first enterprise-ready server-hosted virtual desktop (SHVD) offering. In July, Burton Group, which publishes server and desktop virtualization product comparison reports, gave that distinction to Citrix's XenDesktop 4 SP1.

Another blow to VMware was the June Goldman Sachs & Co. report, which stated that the VDI market has moved in favor of Citrix. Goldman said that between 2009 and 2013, it expects Citrix's market share to increase from 42% to 50%, and VMware's share to drop from 51% to 39%. Previously, Goldman had predicted that by 2013, the two companies' shares would stand head to head.

Can VMware's server virtualization lead hold?
Though there are competitive server virtualization offerings on the market today, VMware still has the lion's share of the hypervisor business and continues selling its products at a premium. The company's market position is in large part because it is a trusted brand, said Dan Kuznetsky, vice president of research operations at The 451 Group, a New York-based independent technology analyst firm.

"Trust is a big thing with enterprise decision makers," Kuznetsky said. "Just ask anyone why the IBM mainframe is still there. Some functions are so critical you don't try to save a little money. There is too much risk."

The correlation between trust and product sales is evident in VMware's earnings report, which shows $674 million in revenues for the second quarter 2010, up 48% from the same time frame in 2009. And though VMware anticipates a flat third quarter for license revenues, the guidance for 2010 annual revenue is 38% higher than it was in 2009.

VMware's revenue is sure to take a hit now that competitive products offer similar features at lower cost than VMware, especially with Microsoft's Hyper-V R2 SP1 now in beta, which comes as part of the Windows Server license. "Hyper-V will make a dent in the virtualization space, especially with SMBs [small and medium-sized businesses] that use Windows," said Barb Goldworm, president and chief analyst at Focus LLC consulting in Boulder, Colo.

In fact, as of 2009, 44% of VMware shops said they used or had evaluated Microsoft Hyper-V, Citrix XenServer or some other platform, and 38% of virtualization users have two or more platforms in production, according to the white paper "Managing the Virtual Environment" by Focus.

VMware is keenly aware of the interest in Hyper-V, especially among small companies that have yet to virtualize any workloads, so it addressed that market with a vSphere package for SMBs: an entry-level Essentials license whose price dropped from $995 to $495.

VMware won't relent on the cost of its other products, though, and prices for advanced editions went up in vSphere version 4.1, which launched on July 13. Essentials Plus increased from $2,995 for three hosts up to $3,495, and Standard from $795 per processor to $995.

VMware's final frontier: Cloud
Since 2008, VMware has waxed poetic about cloud computing, when the company's co-founder, Diane Greene, was still at the helm publicizing the Virtual Data center Operating System vision. But the market wasn't interested in listening then, and for the most part, customers still aren't ready for cloud computing.

"There is a lot of evolution that has to happen for the cloud shift to actually take place," said Mark Bowker, a virtualization analyst at Milford, Mass.-based Enterprise Strategy Group. "But if it does happen -- and that is a big if -- they are positioning themselves well."

VMware considers cloud computing an extension of server virtualization and refers to vSphere as a private cloud platform. The company anticipates vSphere private cloud users will want to transition to vSphere-based public clouds in the future.

The move from private to public clouds will happen using a product that VMware is expected to launch during VMworld 2010 called vCloud Service Director (or Project Redwood). This proprietary set of tools ties VMware private clouds to outside service providers running the vCloud Express service.

Some IT pros use vSphere to build private clouds today. But getting a critical mass of public cloud providers to buy vSphere rather than cheaper options such as XenServer or the free, open source Xen hypervisor will be a challenge, especially since cloud service customers don't see or care about the back-end infrastructure.

"Where do [hosting providers] make their money? It's the margin between what the products cost and what they can charge for the service," Kuznetsky said. "If they have a choice between a VMware hypervisor and someone else's product that is drastically cheaper -- if no one is looking and no one cares -- they will go cheaper."

That means VMware has to reduce its prices to compete in the cloud market, but the company still has no plans to do so.

In fact, VMware is just as confident about its future cloud offerings as it was about server virtualization and doesn't worry about the cost barrier. A VMware rep who wished to remain anonymous said that since 90% of the virtualization market uses VMware products already, cloud computing won't happen without VMware.

Executive Editor Margie Semilof contributed to this report

Let us know what you think about the story; email Bridget Botelho or follow @BridgetBotelho on Twitter

This was first published in August 2010

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