VMware Raises the Cloud-Computing Ante
VMware joins Microsoft, Google, and Amazon in the race to help build the world's next generation of software
February 24, 2009, 5:01AM EST
By Aaron Ricadela
The tussle between VMware and Microsoft in the market for high-end computer software is about to kick into high gear.
On Feb. 24, VMware (VMW) released key pieces of an ambitious new product that's designed to help companies more efficiently juggle complex computing tasks. Dubbed the Virtual Data Center Operating System (VDC-OS), the software creates a bank of computers, storage devices, and networking equipment that a company can tap at will, as computing needs arise—say, during a December spike in Web traffic for an online retailer.
The software, due later this year, reflects VMware's push into so-called cloud computing, which lets a business rely on an outside provider for storage, data processing, and other computing tasks. The idea is that a company can reduce expenses and save time by turning costly computing over to a better-equipped provider. By making the leap, VMware becomes the latest tech company, along with Microsoft (MSFT), Google (GOOG), and Amazon.com (AMZN), that wants to supply the tools for building the world's next generation of software.
Heated Battle with Microsoft
The battle with Microsoft has been particularly bloody. Last year, amid signs of accelerating competition from Microsoft, VMware replaced then-CEO Diane Greene with Paul Maritz, Microsoft's No. 3 executive in the 1990s. In January, another former Microsoft lieutenant, Tod Nielsen, became VMware's chief operating officer. Both were veterans of Microsoft's bruising battles with Netscape and Sun Microsystems (JAVA) in the '90s, and the landmark antitrust trial that ensued. Together, the team is trying to help VMware avoid the kind of fate Microsoft once dealt to others.
VMware grew to $1.9 billion in sales by proffering virtualization software that helps companies slice costs by loading up computers with more work, cutting hardware and power costs. "The growth here has been great," says Nielsen. "We won the Super Bowl. I want to win the Super Bowl every year." Not if Microsoft can help it. Last year, Microsoft started giving away similar software with versions of its Windows Server operating system, cutting into VMware's sales.
Now, to increase its chances of staying relevant, VMware is assembling a network of hardware and software companies that can make their products work seamlessly with VMware's, realizing additional sales as customers buy the vendors' products together. VMware is also trying to expand its customer base by courting Web companies whose sites could run faster using its software.
Building an Ecosystem
Building networks of developers, creating what's known in tech circles as an ecosystem, is a specialty of Nielsen's. He joined VMware after serving as CEO of programming tools company Borland Software (BORL), and headed developer relations at Microsoft in the '90s. VMware's sizable customer base—it counts 130,000 companies that run its virtualization software—could give it an edge in attracting developers. So could cooperation with powerful allies Intel (INTC) and Cisco Systems (CSCO), both of which are VMware investors and counting on its products to enhance their own. "Ecosystems follow opportunity," Nielsen says.
VMware needs just that as growth tapers off from the torrid pace that resulted in the most successful initial public offering of 2007. The company's revenue increased 42% last year vs. 88% in 2007 amid an IT budget clampdown and competition from Microsoft, which includes its product free with Windows. "If a customer bets on VMware, they're stuck in a high-priced, proprietary model," says Zane Adam, a senior director for virtualization at Microsoft.
Another problem: VMware's products, for all their popularity, are more of a nice-to-have than an indispensable computing platform that software developers need when they create programs and Web sites. To thrive in the new world of cloud computing, VMware needs to make its software integral to others' products and expand its market beyond improving the efficiency of applications written for Windows, says Bill Coleman, CEO of data center software company Cassatt. "I've told Paul [that]," he says.
Collaborating With Cisco
To be sure, sales of virtualization software are still growing. Sales of the software are expected to increase 43%, to $2.7 billion, in 2009, according to market researcher Gartner (IT). VMware's stock has also outperformed the broader market this year. The shares are down 9.5% in 2009, compared with an 18% drop in the Standard & Poor's 500 index.
Other pieces of its strategy are falling into place, too. At its VMworld Europe conference, the company plans to release the specifications that programmers need to communicate with its upcoming VDC-OS software. Internet hosting companies will need those specs to serve up computing power to customers via VMware's new system. So will the makers of programming tools VMware is working with to tap a new set of customers—Web 2.0 companies that build their sites using modern programming languages like Java and Ruby on Rails (the language of choice for Web phenom Twitter).
Bigger announcements are likely on tap. Cisco is collaborating with VMware to build a combination server and networking device loaded with VMware's virtualization software, called the California Project, that would let companies speed up software performance, according to a Feb. 18 research note by Samuel Wilson, a managing director at JMP Securities (JMP). Cisco and VMware "want to be the guys who provide the infrastructure that allows cloud computing to work," Wilson says. As part of the deal, Cisco will sell VMware licenses on the computers, expanding VMware's reach, he says. VMware didn't confirm or deny the research note; Cisco declined to comment.
Virtualization Boosts Performance
VMware also plans to be part of Intel's launch of its upcoming Nehalem chip for servers in March, describing how its software can help other applications take better advantage of the ultra-fast chips.
Using virtualization to eke more performance out of the latest chips is important for Web hosting companies, says Jason Waxman, a general manager at Intel. By 2012, Waxman estimates that 20% to 25% of Intel's server chips will be sold inside computers that run in supersized data centers of 1,000 machines or more.
VMware made a name for itself by addressing two bogeymen of IT departments—server sprawl and spiraling energy costs. Now it's aiming to become a more integral part of companies' computing operations. "Just being the king of yesterday's applications and not thinking about tomorrow's applications is inconsistent with what we're trying to build," Nielsen says. To ignite a new phase of growth, VMware will need to hew closely to that prescription.
Ricadela is a writer for BusinessWeek in Silicon Valley.
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