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The recent trend toward everything software-defined, fueled by small companies and large multi-national corporations alike, has had a major effect on the IT market. In the case of VMware, ESXi no longer sees the growth it once did and, in recognition of that, the vendor has made a massive investment in its software-defined data center offerings. According to Pat Gelsinger, CEO of VMware, the vendor is focused on transitioning from a compute virtualization company to one that provides a portfolio of products and services across cloud, networking, security and more.
Based on VMware's Q3 2018 earnings report, it's an effort that's paid off: Total VMware revenue increased 11% year over year (YoY), while license revenue increased 14% YoY. Hybrid cloud and SaaS accounted for over 8% of VMware's total revenue. That might not sound like an impressive amount but considering that VMware Cloud (VMC) on AWS was only released in August 2017, it’s a solid start for VMware's hybrid cloud offering. And this number will only increase now that VMC on AWS is now available in both AWS U.S. West and U.S. East.
VMware takes new approach to licensing
VMC on AWS is significant for two reasons: One, VMware finally has a serious cloud offering that can compete with other vendors. Two, it enables VMware to break free from some of its cost-related shackles. VMware licenses per CPU socket. This licensing model dates back to when servers had one or two cores per socket; however, the number of cores per socket has drastically increased over the years. In order to accommodate this increase, servers would have to scale up, which would result in fewer sockets for VMware to license. In an attempt to prematurely avoid a loss in licensing revenue, VMware changed to vRAM licensing in 2011. But after an overwhelmingly negative response to the so-called "vTax," the company reverted to its original CPU-based licensing model.
VMC on AWS is something of a do-over for VMware, one that allows the vendor to move from a per CPU socket license to a per VM license. Although the base VM license won't change, everything that sits alongside the hypervisor, including NSX, vRealize and core parts of VMware's automation platform, will move to a per VM licensing model.
NSX and vSAN see continued growth
NSX networking and vSAN storage continue to be major sources of VMware revenue. Both offer metered consumption models: VSAN licensing is based on usable capacity, while NSX is licensed per VM. To put the strategic importance of NSX and vSAN in context, NSX license bookings grew 100% YoY; vSAN license bookings grew 150% YoY. Compared to general software sales growth, that's an exceptional growth rate.
According to IDC, VMware was the largest hyper-converged infrastructure software vendor in the first half of 2017. This sustained growth is essential to VMware's continued success, as both vSAN and NSX play an important role in multiple products in VMware's portfolio.
One of the contributing factors behind vSAN's growth is that it's popular with large businesses, for a number of reasons: VSAN is inexpensive and can reduce costs of legacy-style support contracts and power. It simplifies management by cutting out the SAN middle man, comes with an easy-to-understand Compatibility Guide and is highly flexible, enabling a storage administrator to create storage workarounds that don't require external storage infrastructure.
Other major vendors, such as Nutanix and Simplivity, have taken a cue from vSAN and incorporated a shared storage model into their own products. This shared storage model enables VMware admins to use vSAN quickly and efficiently to create a production-class hypervisor environment.
How NSX boosts VMware revenue
NSX has enjoyed similar success to vSAN and has changed networking in much the same way that vSAN changed storage. NSX creates a highly secure software-based environment. It also provides an advanced networking security infrastructure that isn't available from other vendors.
NSX moves all complex functionality from the physical switch to a software-defined switch, which reduces the infrastructure replacement cost. The move to a software-defined switch also creates uniformity across the environment, which reduces support and maintenance costs.
NSX provides security through a variety of means, including built-in containers. NSX makes it easy to build a dozen different machines and makes sure the correct security profiled is applied. Since NSX is tag-aware, applying the security profile is as easy as applying the correct tag to the VM or container because the rules are applied at a microsegmentation level.
NSX can also detect a VM or container that differs from the desired state and automatically take remedial action, as defined by the network admin. This means that if a VM is compromised, NSX will identify it and take it offline. These capabilities enable companies to reduce the cost of legacy networking hardware and add security measures to prevent corruption.
Thanks to these features, I suspect that the growth and uptake of both vSAN and NSX will continue. Looking to the future, these products, along with VMC on AWS, will likely continue to contribute to VMware revenue in a major way.