John Katsaros

Is that a chip on your shoulder?

VMware spent a disproportionate amount of time in the Analyst meeting "explaining Microsoft's competitive playbook" (the Karl Rove perspective on industry competition) apparently in hopes of explaining how MS was lying and cheating and distorting the facts about virtualization. Given that a younger and brasher VMware in the not so distant past redefined vendor arrogance on more than one occasion, this seemed to fall in the category of "the pot calling the kettle black," and for us probably had the undesired outcome of demonstrating how much VMware really fears the Evil Empire from up north. Or are we unduly cynical for assuming that all vendors spin the facts to suit their pleasure? Isn't that the definition of "marketing?" Many of VMware's top execs spent significant successful portions of their careers at Microsoft and seem to be overly conscious of the Microsoft threat to the point where they may be caring more about Microsoft's reactions to what VMware does than to how customers may react. We had to sit through rather long diatribes about the "Microsoft Playbook" and what to expect from Redmond. There's an old adage in the advertising business that says you're winning the battle if you can get your competition reacting to what you do rather than paying attention to what customers want. Without even firing a shot across the bow, Microsoft is commanding more of their mindshare than it may be due. Let's hope that's not the case here.

Finally — A Major Acquisition

Unfortunately, where its ecosystem of software business partners is involved, VMware has been its own worst enemy. Potential partners have had difficulties building a business around the VMware platform not knowing what categories VMware is planning to compete in and which will be left to business partners to pursue. Compounding the problem, VMware has, until now, been low balling its acquisitions (see table below). Cisco is often accused of overpaying for startups it acquires but it surely makes it worthwhile for investors to back companies in new networking categories. On the other hand, venture capitalists have been cautious and overly negative about funding software companies in the virtualization space. Maybe the price it's paying for SpringSource might be an indication that Moritz intends to make a change here too and brighter days may be ahead.

  
 

Upgrade Status

In his keynote at VMworld, Paul Maritz predicted that 75% of customers intend to upgrade to VMware vSphere by the end of 2009. The chart below illustrates the anticipated adoption rate. Considering that vSphere shipments started in May and that VMware has such a large installed base largely made up of enterprises, meeting this year's end goal would be one of the more remarkable upgrade adoption rates in the software industry and a real testament of the customer loyalty that VMware has built. If this is the case, then many companies in the VMware ecosystem need to quickly understand the difference that vSphere adoption will make with regards to customer demand.

Is it Safe?

Last year we wrote a research report about VMware's introduction of its VMsafe APIs to enable selected partners to develop security products for VMware environments.  We interviewed most of the 20 VMsafe announced partners at the time and found that there was a lot of confusion about what VMsafe would actually be and when it would be available. We concluded that this was something that virtualization security start-ups should avoid getting intimately involved with VMsafe until there was a clearer roadmap with the possibilities of third party adoption and monetization.  Since then, several of these partners either had disappointing results and/or dropped out of the business completely.  So now that VMware has included its VMsafe APIs in its newest vSPhere 4 release, it's time to re-consider the situation.  As adoption of VMsafe 4 occurs, so will the ability to use VMsafe security partner products which, in turn, means that this may (finally) be the beginning of the market for security add-ons to VMware.

VMware's Latest Pitch

When Paul Maritz took over as CEO of VMware last year, he set out three clear goals, one of which was to focus on Cloud Computing.   Toward that end, the company recently announced its VMware vSphere4 product, positioning it as an operating system for building internal clouds and once again fueling the battle of operating systems versus Microsoft.  We've seen these battles before and the endings haven't been pretty.  Who knows, maybe VMware has had an early enough lead to do better than others that have fought in this war.  Considering that Maritz once worked there, he's at least aware of what he's up against.

New Positioning

If you've got all of this "infrastructure stuff" that makes virtualized data centers operate efficiently, then why not wrap it up in a nice bow and call it an operation system? Paul Maritz could have used words like "platform" to describe it but it really doesn't matter. What's important is that VMware has built a lot of special stuff and once they get customers using it it'll be hard for them to switch to something else. Is this a new category like VMware claims? Who cares? The phrase Data Center Operating System is functional enough to serve as an overarching name for this collection of virtual infrastructure stuff. So why not fight the battle against Microsoft this way? Interestingly, Maritz spent a lot of time talking about their virtual desktop plans which, apparently, he felt has been underfunded and for which we'll see a big investment in the future. It seemed that Maritz's vision of where VMware is heading served the dual purpose of informing customers as well as telling VMware's own internal employee base where they need to head. If one of his goals was to politely close the book on the Diane era ("we own the market") and start dealing with the competitive threats from Microsoft and Citrix, then that was successful.

BYOPC

With all of the fuss from Microsoft's big virtualization coming out party and the VMworld users conference, Citrix wasn't sitting around idle. Citrix announced its XenServer 5 edition, its partnership with Marathon and its cloud computing strategy -- Citrix Cloud Center (C3). At its analyst conference earlier this month, Citrix demoed its desktop virtualization product portfolio -- probably the most comprehensive suite of desktop virtualization products. Their "guiding light" is that ultimately CIOs will want to get out of the business of owning and managing desktops and instead will adopt the "Bring Your Own PC" for the modern workforce that wants the benefits of consumerism in order to use their own laptops and iPhones instead of clunky corporate issued devices. Two concepts -- BYOPC and "follow me desktops" form the foundations of the virtual desktop initiatives.

Market Shift

Frequently we've had people tell us that virtualization is still in the "experimental" stage and not yet generally deployed in production environments. That might have been the case a couple of years ago but today there are more than enough production virtualization case studies to validate the claim of the production readiness of virtualization. Last week's VMworld with 14,000 attendees provided ample proof of virtualization's production deployment status. VMware handed out the results of its periodic customer research survey which shows EMX production deployment at 94% of its customers -- a remarkably high deployment rate -- and that 47% of VMware's customers use virtualization as the "default build" for new server deployments (up from 25% in 2007). What's more, their survey showed an increase in the percentage of customers who run in production virtualized versions of higher payload applications like databases and Microsoft Exchange. The more significant change from VMware users is that their CIOs are asking the question -- "What are you going to do for me this year?" These CIOs like the initial returns from virtualization but now want incremental improvements from datacenter operations -- like improved server consolidation ratios, improved management, Disaster Recovery, High Availability, Fault Tolerance... Now that the initial virtualization steps are underway, the market is shifting to operational improvements. So if you think the market is still experimenting with virtualization, you're likely to miss what's actually happening.

Atlas Blinked

It took VMware's new president and CEO Paul Maritz only 20 days to make the decision to give away its stand-alone ESXi hypervisor (it used to be priced in the several hundred dollar range). Most major server manufacturers including Dell, Fijitsu-Siemens, HP, IBM and NEC have embedded VMware ESXi. So the OEM community is probably delighted as are customers. (When asked, VMware customers told us that they welcomed Microsoft's entry into the market if for no other reason than to keep a lid on pricing -- so they got that wish.) This move focuses VMware on making money from higher level value add functionality. VMware has a broad enough product line to manage this shift gracefully. But now that this pricing decision is behind them, what's next? We know what it should be -- heterogeneous management -- managing not only VMware's hypervisors but also those made by other vendors (like Microsoft and Citrix). What we don't know is WHEN VMware will decide to manage products besides its own. Here's our brief timeline of the changes so far -- June 26th -- Microsoft releases Hyper-V to the market at $28; July 8th -- Management shakeup at VMware -- Paul Maritz takes over as CEO; July 28th -- ESXi hypervisor price reduced to free. We can't wait to see what's ahead.

Seething

In last week's press release announcement of Diane Greene's sudden departure you could almost feel Joe Tucci's tension jumping out of the page. Tucci, who has multiple roles as the chairman of VMware's board as well as chairman, president and CEO of EMC, has had to sit back and watch EMC's share price drop -- being pulled down by VMware -- since Microsoft launched Hyper-V. That's because EMC owns such a big piece of VMware which, in turn, accounts for a significant amount of EMC's current valuation. Until VMware's IPO last year, EMC's stock price was fairly typical for a large high tech company. But for the past six months EMC's stock price has been as volatile as they come. You can't blame him for wanting to get things under control.