Peter Christy

The Virtualization War

At the Microsoft Virtual Analyst Meeting, Muglia chirped happily that he was gaining hypervisor market share every day. Although we think that must be true, we couldn't get any of the underlying data so we couldn't de-spin it. As we continue to muck about in the Cloud and Utility Datacenter, it's pretty clear that's still all about VMware. So what does the future portend? I continue to think that Microsoft is strongly in the game. The most recent financial reports give an interesting perspective on this. VMware has suffered a year of quarter-over-quarter declines in license revenue, buffered somewhat by rising service revenues. This isn't necessarily a bad report, but at the most recent report Microsoft reported that System Center - the System Management tool that in the end is probably what VMware competes with - grew at a very healthy year-over-year rate of 30% (independently we have heard that it is about a $1.5B/year product. That suggest that System Center is significantly bigger than VMW (comparing apples to apple if that is possible) and growing much more rapidly. As we said, it would probably be premature to count Microsoft out now.

The Cloud (Dessert Topping or Floor Cleaner)?

 John and I have done a lot of interviews with Cloud "experts" over the last few months (this is the fun part of our business, hunting down and talking to really bright people). On the one hand, a lot of the analysis bandied about is malarkey (to be polite). Enterprises won't jump into public clouds to save buckets of money any more than we've all given up our cars to drive Hertz Rent-a-Cars instead (shouldn't they be a lot cheaper for the same reasons, huh?). On the other hand, we've been talking to many of the most successful ventures using Amazon (primarily, and other Cloud providers) and the stories are very interesting. There seem to be two important takeaways for me: (1) The cloud is software gurosity unleashed. A team of brilliant programmers and system architects can make incredible things quickly when unfettered from the nasty bits of buying and running the hardware infrastructure; (2) For speculative ventures, it's hard to beat the economics of pay-as-you-go. VC's like the Cloud because they don't have to by capital equipment with great impact during the early stages of the venture in terms of getting real product development bang for the buck. But it's also clear from these stories that the same benefits carry forward into real service operation especially if the success of the service is unpredictable, especially on the upside. One more time, we seem to be collectively overestimating the short term impact but probably underestimating the long term impact.

The Light at the End of the Tunnel (or is that a train coming our way?)

How do you sense the turn about? It probably requires a basic understanding of calculus - the most important issue is the first derivative (no I'm not talking about bad investments!) and not the absolute value. For example, Cisco just reported another really bad quarter in the sense that their revenues are nearly 20% under last year, and more or less the same is expected for next year. So how could John Chambers possibly have optimism other than too much Diet Coke in one afternoon? The answer is that the quarter-to-quarter and seasonable behavior is starting to look a lot healthier (the first quarter-to-quarter growth in a year). On top of that both Cisco and Microsoft have done an impressive job of ripping out cost, so if revenues start to rise they are both in a pretty good position to move forward and do body damage to their less sturdy competitors (what normally happens in a downturn is that the strong get stronger).