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.
