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.

VDI 2010

This part of the VMware strategy seems to have changed a lot in the last 12 months although the VMware spokespeople didn't like it when I said that. One of Paul Maritz's earliest acts was to amp up the VDI investment a lot, believing it would seem that desktop management was ripe for the same kind of revolution that had driven the first wave of data center consolidation, and that VDI could be an important kicker to VMW revenues. I've always been personally skeptical, believing there to be good markets for server-based PC virtualization, but relatively small ones (we even have a two year old report to that effect J ). Citrix's view has been different, benefiting from their longstanding leadership in a broad "application delivery" market, and from that context viewing virtualization as an important new tool to work with but not the second coming. In Mark Templeton's Synergy 2010 keynote he painted a vision based on getting to your "stuff" (my term, not Mark's) from any device anywhere in the world in a fashion that optimized performance while preserving security. The Maritz view is very much in-line now, emphasizing user device support more than the wonders of server virtualization. To be fair to VMware, no one reasonably anticipated the impact of the iPhone and iPad on corporate IT. Templeton and Citrix have promoted the concept of "consumerism" for quite a long while, but Apple moved that from a strategic alternative (something a company might choose to do) to a tactical imperative (in the last quarterly call, Mark made special mention of how the iPad is starting to really disrupt corporate IT). VMware seems to agree that application delivery (your stuff from anywhere on any device) is the right focus (not their words). If that's the mission then Citrix's strengths in the battle are more self-evident now. It's going to be a good (and productive) war that the consumer will ultimately benefit from!

VMforce

VMware and SalesForce just introduced VMforce and interesting blend of VMware's Spring framework with SalesForce's Cloud platform. Once you have authenticated into the Cloud you can drag-and-drop a Spring program from the development environment directly to the Cloud. For applications that leverage what's already in SF and Force.com being able to write programs in Spring is quite powerful. If, as Paul Maritz seems to believe, enterprise Java developers significantly outnumber Windows application developers, this will be a very important step. If the inverse is true then Windows Azure is a much richer program because of all the existing Windows apps, the maturity of the Windows application model and programming tools, and because of some of the other aspects of Azure (SQL data services, the Azure Fabric Controller). Time will tell.

VMware Acquiring SpringSource

Paul Maritz seemed a little discouraged that the analysts didn't want to ask questions about SpringSource, which is understandable since the acquisition clearly has strategic importance for VMware beyond the $420M they are paying (not chump change). The lack of questions isn't surprising if you ask how many of those analysts really know what a framework is (having managed Dev Tools for Apple, I do.) The underlying question is whether VMware can thrive building systems that manage virtual machines or whether they need to get much more involved in what happens within those VM's in order to solve the customers' important problems and profit by providing those solutions. I've never thought that VM's were the do-all, end-all, and apparently VMW has come to the same conclusion. A framework is an architecture for implementing applications and a lot of code ("subroutines" in the good old days) to support that architecture and make application programming easier by providing a higher level abstraction. Utility and Cloud computing have great benefits but come with their own challenges. For example, what kind of data storage systems work well across multiple data centers and improve application performance for remote users? Or how do you know enough about what an application is doing in order to better automate its operation (e.g., provide desired availability and scaling)? In both cases, VMware's ability to play in the game is considerably improved with access to a framework than if complex technology can be largely concealed under the framework abstraction and just come to play when needed behind the scenes without much involvement from the application programmer. Microsoft already has broadly used frameworks (Microsoft Foundation Classes and more recently the .NET Framework). It's really hard to create a framework from scratch — the value of a framework goes up quickly as more people use it so you need both the framework and the users. The Spring Framework was created as an alternative to complexity of what Sun had developed for Java application architecture, and caught on in no small part because it was open source and free. As a way of getting into the framework business (more specifically, getting in a position of influence with the developer community and being able to add mechanism behind the scenes) VMW didn't have many alternatives and SpringSource was by far the best, subject only to the high cost (spending $420M for SpringSource isn't "accretive" by any stretch of the imagination). As noted above, it isn't as if MS doesn't have frameworks or developers — they certainly do —  but it does redefine how VMW views the competition and competes. (VMware declined to comment on this story)

What a Week

Paul Maritz must have had a reasonable idea of what he was getting into. In most aspects VMWorld was been a smashing success -- large and enthusiastic crowds, a big ecosystem pavilion. Paul did an excellent job on the keynote considering he had been on the job for all of 10 weeks (he was blessed by the fact that Diane Green was truly an awful public speaker so the hurdle was low) that dovetailed nicely with CTO Steve Herrod's excellent technical keynote the next day. Maritz sounded more like the leader of a $2B software company than VMware. The plans sound like business plans: (1) Paul admits they are really a platform vendor and they talk about a Data Center OS, (2) he put a stake in the ground that the Cloud was going to be a real business and (3) that they were getting serious about VDI (now branded as vClient). All of this makes sense if you're trying to answer the question "How will VMware make money?" (the question that Diane never wanted to talk about it). On the other hand, with the collapse of the "virtualization" reality distortion field came a further (and I'm sure painful) deflation of the stock, taking it down well under the initial IPO price. Some of the commentators apparently never realized that VMware really does compete with the big boys. Oh well...