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Over the past few years, the virtualization market has become saturated. There aren't any major new players on the scene and most data centers have already been virtualized, leading to revenue stagnation. Last year, Gartner reported a decline in new software licenses for the first time since virtualization became mainstream over a decade ago. In fact, the bulk of x86 server virtualization revenue now comes from maintenance rather than new licenses.
When this kind of market saturation occurs, it's often the company on top that's hit the hardest. In this case, that's VMware. Without any net-new virtualization opportunities, vendors have started cannibalizing their competitors' customers. Since VMware has the biggest market share in the industry, it only makes sense that it has the largest target on its back with Microsoft and open source competitors vying for its customer base.
It's worth noting that since Microsoft offers Hyper-V for free in its Windows Server operating system, it's hard to ascertain how much revenue the hypervisor itself generates, and whether this market saturation will have as great an effect on Microsoft as it does VMware.
Cloud computing looms on the horizon
Not only has VMware experienced a decrease in vSphere revenue, but it's also feeling the fallout from the rapid adoption of cloud computing. The infrastructure-as-a-service cloud market has been growing steadily at a rate of 40% in revenue per year since 2011, and Gartner predicts that by 2019, the majority of new VMs will be deployed by cloud providers. Customers are now looking to Amazon Web Services, Microsoft Azure and Google Cloud Platform for net-new workloads.
VMware hasn't taken the news lying down. The company has broadened its portfolio in anticipation of this market saturation and now encompasses the software-defined data center with vSAN and NSX.
Time for VMware to make a change
Although VMware has diversified its product base, it isn't completely out of the woods yet. That's because, as of now, every product in the company's portfolio is dependent on the vSphere hypervisor.
What happens if customers choose to migrate from vSphere to Hyper-V or to KVM? How will VMware generate new revenue if customers no longer run its vSphere hypervisor? This seems like a pretty big flaw in VMware's strategy.
In my opinion, VMware needs to swallow its pride and consider giving vSphere away for free. Think about it: VSphere is the foundation for most VMware products. Without it, customers can't invest in additional VMware products. This would also silence those who point out that Hyper-V is free.
If VMware were to make such a licensing change, the battle between vSphere and Hyper-V would be over which hypervisor is technically better rather than which one is more affordable. Since VMware is miles ahead of Microsoft in terms of CPU scheduling, memory management, high availability, live migration of VMs and density per host, it stands a better chance of winning that battle.
Now, I'm sure VMware isn't willing to just give away its crown jewel, especially considering the significant investment the company has made to get vSphere where it is today. In that case, why not just give vSphere Standard away for free? Granting users free access to vSphere Standard would not only silence Microsoft's marketing snipe, it would also allow VMware to boost NSX and vSAN sales on top of the free vSphere Standard hypervisor.
All the advanced features you get with Enterprise Plus -- Distributed Resource Scheduler, Auto Deploy, Host Profiles and Distributed vSwitch -- can be justified as a paid for feature.
What about vCenter Server? Well, this should continue to be a paid product, especially since you need to buy System Center Virtual Machine Manager (SCVMM) to successfully manage multiple Hyper-V hosts.
VMware feels the heat from Microsoft
We'll see a lot of customers upgrading their OSes to Windows Server 2016 in 2017. However, after talking to some customers, it seems the majority of them are unaware that Microsoft has changed the licensing model for Windows Server 2016 from a per-CPU model to a per-core model. Microsoft claims that it made this change to align licensing for multicloud environments.
It's easy to see why Microsoft made this change: The advancement in CPUs has led to more cores on a single piece of silicon, which, in turn, means more powerful servers running more VMs than ever. Therefore, moving to a per-core licensing model gives Microsoft a new way to charge customers for the amount of computing power available to them.
The new Windows Server 2016 licensing model sets a minimum requirement of 16 core licenses per server with a minimum of eight cores licensed to each physical processor. This means if you deploy a server with a single CPU with less than 16 cores, you still pay for 16 core licenses. Given that most modern processors already have large core counts, you can quickly see that this "core tax" is a quick way for Microsoft to make money.
It's worth noting that for Standard Edition you are only covered to run two VMs if all the cores are licensed -- that means for a dual 10-core CPU host running 20 VMs, you would need to purchase 200 core licenses. Most end users will realize that transitioning to the Datacenter Edition makes licensing easier and cheaper for dense virtual environments.
Where does this leave VMware customers who don't pay for Windows Server Datacenter Edition? It probably means a huge licensing budget. Not only do you have to purchase a hypervisor license for vSphere, you also have to license every Windows VM you wish to run on your hypervisor, per core. If, in the past, you've licensed your environment with Windows Server Standard, you will quickly realize that you'll become noncompliant if you upgrade to Windows 2016 via your Software Assurance.
The problem is that many customers believe Hyper-V is free, but this is actually a misconception. On the one hand, customers need to license the OS of a VM, and Windows Server licenses give you the ability to run a number of VMs on top of Hyper-V. However, for larger virtual estates customers will probably have to run SCVMM in order to manage the Hyper-V cluster and resources.
With Microsoft introducing a new licensing model, it only makes sense that VMware adopt a new licensing approach as well -- ideally, make vSphere Standard free. If VMware sticks to business as usual, Microsoft will make it even more compelling for customers to drop VMware because of costs. The smartest thing VMware can do is take that discussion point off the table by making vSphere free, too.
Quiz yourself on Windows Server 2016 licensing
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