Is VMware a Sinking Ship?

Faced with a gathering competitive threat, VMware has taken its knocks. But the leader of the virtualization pack isn’t out quite yet.
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When VMware’s stock took a nosedive last month, the headlines were grim. “VMware Smashed,” said one; “The Party’s over,” said another. My favorite of these claimed that VMware had suffered through a “Wall Street Chainsaw Massacre.”

What was missed in all of this doom and gloom was the fact that VMware’s revenues were actually up – way up. Yes, they missed their Q4 projection, which is why Wall Street punished them, but the fact remains that their revenues were up 80% over Q4 2006.

Stock analysts were concerned not just by the missed revenue number, but also by the fact that the company predicted its growth in 2008 would be a mere 50%. Has the market become so irrational that 80% year-over-year growth and 50% projected growth is bad?

“VMware’s near-term prospects look good,” said Gary Chen, senior analyst, enterprise, for the Yankee Group. “Their competitors are just trying to get their products out of the gates, and VMware will maintain technology leadership for a while.”

On the other hand, VMware’s competitors are established companies with deep pockets. “2008 will bring the first of a series of challenges,” Chen said. “Microsoft will enter the market, for real, in 2008, and as VMware expands into international markets, it will be tested. Microsoft has a significant global reach.”

2008 Brings New Players into the Mix

Other competitors are aggressively entering this market as well. The Citrix virtualization product, based on the open-source Xen, has quietly been gaining momentum, and a slew of other Xen-based virtualization products have started hitting the street, including those from Red Hat, Novell, Oracle, and Sun.

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Still, Microsoft is the main concern here, since history has shown that competition from Microsoft has spelled doom for a number of technology upstarts. While Microsoft’s current virtualization offering, Virtual Server, is rather primitive, the tech behemoth has never let inferior products slow them down.

Their virtualization moves so far follow Microsoft’s typical new-product playbook: first, float a product, any product, just to get your feet wet, regardless of quality; next, follow that up with product improvements and a degree of credibility; and, finally, dominate the market by wedding the product to Windows.

Microsoft is already well along this path with virtualization. Virtual Server was a dud. So, Microsoft scrapped it, and the development team started over from scratch. The new virtualization effort, Hyper-V, is due out in the fall.

While Hyper-V won’t match VMware feature for feature, early reports make it sound like a viable technology. Meanwhile, Microsoft’s virtualization roadmap clearly spells out that they want to integrate virtualization at the OS layer – yet again leveraging Windows.

Burton Group analyst Richard Jones notes an eerie similarity between VMware and Novell circa 1996. NetWare was the only network server OS game in town for much of the 1980s and 1990s. When Microsoft went after this market, its initial offering, LAN Manager, was inferior and mostly ignored – just like Virtual Server.

Microsoft scrapped LAN Manager, started over from scratch, and came up with Windows NT. While Windows NT couldn’t match NetWare feature for feature, by the time NT 4.0 came out, many considered it good enough, and, eventually, Microsoft overtook Novell.

Could history repeat itself with VMware?

“VMware has it in its power to not let history repeat itself, but they need to be smart about their product roadmap,” Jones said. According to Jones, VMware should broaden its IT portfolio – and soon. Otherwise, as Microsoft gains traction, its broad portfolio will trump VMware’s technical leadership.

“I’m not talking about the traditional things,” Jones said. “Microsoft has those locked up.” Instead, VMware should pursue disruptive technologies, such as productivity applications.

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