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Price history points to cheaper VMware

VMware has a history of decreasing its prices in response to competition. With Microsoft's release of Hyper-V, will VMware repeat the pattern or maintain its current per-socket pricing structure?

A close look at VMware's product pricing history reveals an interesting relationship between VMware's pricing strategy and its competitors. When Microsoft releases Hyper-V with Windows Server 2008 to the general public in August (though it is rumored to perhaps be sooner), VMware will face substantial new competition. Despite its 9 year history as king of the server virtualization market, analysts say VMware will have no other choice but to drop its prices to remain the reigning champion.

VMware Workstation starts the fun
VMware Workstation, VMware's first virtualization product for x86 servers, first shipped in 1999 with an original price of $399. At the time, the only other major competitor was Connectix's Virtual PC, which retailed for $229.

In 2003, VMware reduced Workstation's price from $399 to $299. In the same year Microsoft acquired Connectix, renamed it Virtual PC, and priced it at $129. VMware responded by adjusting Workstation's price to $189 in order to remain competitive.

But some users have found Workstation competitive in spite of how VMware priced it. "That's the product I've been using for 9 years running," said Chris Wolf, senior analyst at Burton Group. "People ask, 'Why would I pay for Workstation when there are other products available for free?' Ease of use for creating virtual machines," Wolf said. "Workstation supports more operating systems than any of its competition by a long shot."

VMware GSX starts high, ends free
Workstation wasn't VMware's only product, though. VMware also offered two enterprise-level products: GSX and ESX. ESX, at $3,750 for a two-CPU system, was the more comprehensive and expensive version of the two. GSX, at $2,500 for a two-CPU system, was designed to allow interested customers to see what virtualization could do for their server farm while allowing an easy upgrade path to ESX.

"GSX was always a very good workgroup-class product for virtualization. A lot of organizations use GSX, or now VMware Server, to get their feet wet," Wolf said. "Once you wanted centralized management or high availability, though, you needed ESX."

In 2004, Microsoft released Virtual Server 2005, which was priced at $499 for four-way servers and $999 for servers with 8 to 32 processors (not including Operations Manager at $729 and the additional $539 for each MOM-managed device). The standard edition cost $499 for up to four CPUs.

VMware again responded by reducing pricing of GSX from $2,500 to $1,400. The new VMware pricing made GSX Server much more market-friendly, even if it was still considerably more expensive than Virtual Server 2005. Michael Mullany, VMware vice president of marketing, explained the reasons for the price drop in a press release:

We're seeing phenomenal momentum in the enterprise for virtual infrastructure, including high demand for VMware GSX Server. Clearly, virtual infrastructure is fast becoming mainstream, with many thousands of VMware enterprise customers worldwide rolling out production deployments. This, along with our 200% year-over-year growth, is making it possible for us to more aggressively price GSX Server.

VMware simultaneously capped the cost of GSX on larger systems (up to 32 CPUs) at $2,800. Previously, GSX would have cost almost double the new cap -- $5,000 -- on just a four-way box, and $10,000 on an eight-way box. Two years later, GSX would be retired from the VMware product line, replaced by its available-for-free successor VMware Server, in a move likely designed to attract new customer interest and prepare its customer base for VMware ESX 3.0.

At roughly the same time, Microsoft made Virtual Server 2005 available as a free download. This may have been a response to VMware's release of VMware Server. But most likely it was because Microsoft was confident about its upcoming server virtualization product, code-named Viridian, which would later be known as Hyper-V.

ESX 3.0 raises stakes -- and price
ESX saw little price-change activity from the 2002 version 1.1 release until the release of version 3.0 in 2006. Version 1.1 cost $3,750 for a 2 CPU system, as did version 1.5 (released in 2002), and version 2.0 (released in 2003).

The ESX pricing structure changed when VI3, or VMware Infrastructure 3, was released; the first major upgrade for ESX in two years. This was no surprise according to Wolf. "VMware's pricing was going up proportionally as its role in the infrastructure increased," he said.

While ESX 1.0 and 2.0 were mostly used in test and development environments, according to Wolf, ESX 3.0 was when large enterprises started to use VMware in production. "As a result, VMware was able to price it accordingly," Wolf said.

Although the second generation of ESX added many management functions, ESX 3.0 surpassed it with VirtualCenter management capabilities:

  • VMFS (VMware's distributed file system)
  • VMware DRS (Distributed Resource Scheduler),
  • VMware HA (High Availability),
  • VMware Consolidated Backup (VCB) and
  • additional security controls.

Pricing for the new version was just as simple: Starter edition cost $1,000 for a two-CPU system, Standard cost $3,750 for two-CPUs, and the enterprise edition started at $5,750 for two CPUs.

The current pricing for VMware ESX (now in version 3.5) is as follows: VMware 3i -- $495, VI Foundation (a.k.a. Starter) -- $995, Standard -- $2,995, Enterprise -- $5,750. Interestingly, the only price change from ESX 3.0 to ESX 3.5 is seen in the Standard version (down from $3,750 to $2,995).

Hyper-V: $28 bucks for enterprise virtualization?
At $28 per license, Hyper-V could be considered a deal: It's fully integrated with a Windows Server 2008 environment, making it the easy choice for any shop that uses Windows Server. Not long after its release, analysts and high-level executives at virtualization management software vendors said that VMware would have no other choice but to cut its pricing.

But will it? Hyper-V requires Windows Server 2008, which is priced as follows: $999 for Standard and 10 client access licenses (CALs), $3,999 for Enterprise (25 CALs). It also has two more key requirements: 64-bit chips, namely Intel VT or AMD-V. Both of these factors could affect potential user adoption. As history shows, VMware is apt to drop pricing when it can afford it, both financially and by offering what is largely seen as the only reliable enterprise virtualization product in the market place. VMware has had little reason to fear losing customers to Microsoft.

VMware price drop in 2008?
David Rule, director for x86 virtualization solutions for Forsythe Solutions Group, believes that VMware is currently in the "wait and see" mode as far as whether or not they'll adjust ESX pricing. According to Rule, VMware is waiting to see if and how Hyper-V actually affects VMware's customer base before they make any changes.

But given VMware's 2007 Q4 stock plummet, it may not be able to afford a price drop on its leading product anytime soon, which could be why VMware CEO Diane Greene stated in January 2008 that VMware anticipated continuing its pricing over the course of the year.

Wolf disagrees. "For VMware to maintain its market dominance, it will have to lower prices. There's just no other way around it right now," he said. "A large part of maintaining its role as market leader involves keeping Hyper-V out of test and development, which would only be accomplished by a substantial VMware price drop," Wolf said.

VMware, in Wolf's opinion, is now up against what he called the "good enough" factor. If Citrix and Microsoft can offer products that are good enough in an enterprise production environment, that gives businesses less cause to fork over cash for a leading product in a tough economy.

"ESX has the clock ticking on it, anyway," Wolf added. "VMware is trying to transition everyone to 3i over the next few years." Wolf also asserts that VMware will drop its pricing on 3i.

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