Is VMware a Sinking Ship?

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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.

For instance, the next frontier for virtualization is the desktop. The real value of desktop virtualization is portability. Just as virtualization makes resources within the data center more flexible, the same holds true with desktops.

The typical vision for desktop virtualization has enterprises looking to this technology mainly as a method of exercising greater control. Simply put, virtualized desktops will be easier to manage centrally. This means that patches are kept up to date, policies are enforced, security is kept current, and help desks calls are reduced.

The disruptive aspect of this, though, would be if virtualization could free business computing from the LAN. Google has tried to push traditional client-server applications to the Web but has been largely unsuccessful.

There are several reasons Google has stumbled with its cloud computing efforts. First, enterprises are reluctant to give up control of their key applications. Second, cloud computing doesn’t cover industry specific niche applications. Third, many of the Web-based interfaces are inferior to those we’re used to on the desktop. And lastly, the real boon for cloud computing is mobility, which has yet to gather momentum. After all, mobile email is lousy enough that it’s spawned an entirely different mobile messaging alternative: texting.

Beyond Virtual Desktops

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“If VMware can combine virtual desktops with Web-based productivity and business solutions, while supporting a range of different devices, this could all change, and VMware would be in the driver’s seat,” Jones said.

Taken further, virtualization could serve as an enabling technology for utility computing. Utility computing has been talked about for years, but little has happened outside of the narrow mainframe world. Better still, from VMware’s point of view, utility computing is a model that Microsoft, with its license-dependent approach, is not likely to be a leader in anytime soon.

This all sounds good, but what are the chances that this vision becomes a reality? After all, nothing’s a given when it comes to technology trends. At first glance, there are serious obstacles. The mobile internet has been talked up for years, but is still underwhelming. The same is true for utility computing and any alternative to the standard client-server mode of computing.

Moreover, VMware doesn’t have the in-house expertise to deliver productivity applications or Web-based business services.

Does this mean you should jump off the VMware bandwagon? Not necessarily. A few acquisitions and a strategic partnership or two could make all the difference. In the meantime, VMware benefits from its technical advantages, while other emerging trends – such as the green IT movement and new hardware designed with virtualization in mind – also play in their favor.

The near-term looks good for VMware, even with increased competition in 2008. Long-term viability is the real question. Even with competition from behemoths like Microsoft, Oracle, and Sun, it’s too early to write VMware off. They have a solid foundation in place. The question is: what will they build on top of it?