Peter Christy

How Microsoft Lost the Virtualization War (when cheaper is wrong ...)

Microsoft didn't have to lose data center virtualization to VMware. It wasn't a question of inferior technology or product functionality. They lost because their business model was wrong.

Microsoft's Server and Tool Business (STB) has done extremely well by identifying markets where complex software functionality can be engineered for simple installation and use, and then brought to market at a disruptively low price point. Time after time this model worked: Windows Server, Systems Center, Exchange and SharePoint. Not surprisingly, when it came to virtualization, this was the business model: offer lots of functionality at a disruptively low-price. Why did it fail so badly in this case?

It failed because virtualization was different. Virtualizing a set of servers isn't like upgrading the operating system or Office. Virtualization enables significantly improved economics but along the way it requires significant changes in how the data center infrastructure is managed and how the data center is organized. Therefore it isn't surprising that customers didn't just jump into virtualization. Instead they brought in consultants to help them plan and implement, and along the way created a new channel focused on the delivery of virtualization solutions.

VMware had an "expensive" solution (although still a very smart investment considered by itself). Selling the VMware solution made a lot more sense for the channel because they made a lot more money doing it, and at beginning the VMware solution was domonstrably "better" than the Microsoft solution (more advanced functionality). So if a channel partner could make a lot more money selling VMware guess what they did?

As the Hyper-V solution caught up (and with System Center in many ways surpassed VMware) guess what happened? More or less nothing, because the channel had no incentive to switch brands. Yes, VMware has an "expensive" solution, and customers would like a "cheaper" solution, but that's not enough given the partner economics.

I finally understand what people were trying to say when they noted that Paul Maritz knew the Microsoft play book ("he had written it").  The genius wasn't just to understand your big competitor well; it was to jujitsu Microsoft (use their own weight against them).  The bigger question is why Microsoft didn't see it coming. The ultimate loss is enormous. Windows Server has done extremely well in the data center. System Center is remarkable management system. But now flanked by VMware on both sides it's going to be challenging to get out of the pincer.  Ballmer has changed the STB management. Microsoft is a smart and powerful company. Next move is necessarily theirs.

VMware VSphere 5: So What?

Last week VMware introduced vSphere 5 with a very professional, Web-based launch (best Paul Maritz talk I've ever heard). The reaction has been minimal... Why?  I think there are two reasons:

1. VMware doesn't really have any competition any more.
2. The adoption of Cloud solutions in the Enterprise is limited more by the rate at which the customers can evolve than by the state of the product offering (VMware is nicely ahead of the customers).

Two years ago, my thesis was that Microsoft would catch up with VMware in terms of virtualization functionality, and then bring the significant assets of System Center to bear competitively. But that just hasn't happened. Microsoft talks proudly of their share gain in hypervisors, but my friends at IDC say that really isn't gain against VMware in the data center. System Center is still a fine offering but Microsoft has nothing like vSphere as a platform offering on which to build private clouds (as you know, where I think the business is today). Microsoft is sandwiched between a VMware hypervisor and VMware service management. If that flanking continues, I don't Microsoft will thrive. 

This week both VMware and Microsoft announced earnings. VMware announced a very healthy 40% Y-o-Y growth rate. It's harder to parse out exactly what System Center revenue growth was but my best guess is that it's something in the 15+% range, not bad, but certainly not keeping up with VMW. A couple of years ago Microsoft argued that VMware and System Center were the only parts of the systems management segment that were growing, and that each was growing about the same rate. As you can see from the chart before, for a while VMware wasn't really growing license revenues: the overall growth came from a increasing service line with a growing installed base. But license revenue growth is back up.

 
Maybe there is another way to view the data, but it looks to me like VMware has sort of won this battle over the last year.

The Exchange in the Clouds

(If you squint your eyes just right it looks like a bull!) The NYSE, in conjunction with VMware and EMC, announced a Financial Services Cloud offering. This is a really good example of what IBM introduced generically some time ago — an industry specific cloud. What's significant about this announcement is the participation of an industry segment leader (NYSE) and that it's built on VMware/VCloud, not what IBM would have used, not built on Microsoft Azure (although in some ways it is probably the more suitable platform). As I noted in the last issue with respect to Hyper-V, VMware is the putative winner in data center virtualization. Given that the enterprise data center is getting more enterprise attention than the public cloud, it stands to reason that VMware is going to have significant influence in what gets build in public clouds (perhaps multi-tenant clouds would be a better term), and that is certainly the case today. Many other vendors want to ignore this because it may not speak well to their future success (e.g. as a security provider) but that won't make VMware's success and influence go away.

Let the Hypervisor Wars Begin!

Microsoft seems to be feeling reasonably good about Hyper-V. Microsoft VP Bob Muglia reports it is functionally complete and performance complete and what remains is ringing out the bugs (as far as I can tell the stability is pretty good already). Mu said it was very surprising to him when they did their first performance testing against VMware ESX last fall and found the HV performance to be in the ballpark. When I first met Bob he was a Windows NT product manager. A key workload for NT was File Server and the competition was Drew Major's NetWare (as regular readers will now, Drew is in my pantheon of software gods). It took Microsoft until NT 4 to be performance comparable with NetWare so you can imagine Mu's surprise and pleasure to find HV Alpha code in the ballpark. The comparison between HV and ESX is complex. Microsoft knows it will take some time to catch up with the full VMW functionality. On the other hand, out of the box HV is supported by System Center, a much more comprehensive management system than virtual center. And just make things interesting and weird, MS announced and demonstrated System Center managing ESX, and MS support for management of key UNIX variants (along with OpenSourcing the integration technology). So this time MS is the heterogeneous, embracing vendor (that clearly tickles Mu too). How this all plays out is yet to be seen. MS points out that they know how to coordinate virtualization with Windows and key MS applications better than anyone and that should be quite valuable (e.g., to make virtual infrastructure memory management more efficient). In any case, MS is cranking up all the MS sales and competitive engines so things should get lively. When I pressed Mu at the MMS analyst meeting to say how we should observe competitive progress he said that after 18 months in the market if they weren't shipping more hypervisors than VMW he would be very disappointed. "Microsoft is very good at high-volume, low-cost software you know" (Hyper-V is priced at $28 if you missed that). Game very much about to be on.