As Brain Babineau, senior analyst with the Enterprise Strategy Group put it: Sun better not mess this up, or they risk being another SanDisk or Yahoo. To refresh your memory, SanDisk was courted for a time by Samsung, while Microsoft contemplated snatching up Yahoo. Both deals fell through, and both SanDisk and Yahoo are struggling.
Analysts have been speculating about how mergers or acquisitions could shake up the virtualization landscape, with rumors swirling about the possibility of VMware becoming part of Cisco. Remember, though, VMware has already been acquired once. EMC owns about 85% of the company, while Cisco has invested $150 million plus into VMware.
While pondering how a Sun-IBM or Cisco-VMware alignment would change the competitive landscape, its worth looking back to the last major virtualization deal for guidance: Citrixs acquisition of XenSource.
The $500 million question was it worth it?
Citrix finalized its $500-million acquisition of XenSource in October 2007. Of course, a $500-million acquisition pales compared to the multi-billion-dollar price tags that both Sun and VMware would command.
However, one of the big questions with any acquisition, regardless of its size, is how well the organizations integrate.
By this measure, the XenSource acquisition has been a success. Citrix has rolled out an enterprise-class virtualization portfolio based on Xen and changed its pricing model, giving away XenServer and focusing on selling virtualization management capabilities.
There are two ways to measure any acquisition. The first is pure revenue growth. The second is how much incremental growth it adds to the entire product portfolio, Babineau said. With Citrix its tough to measure. Xen certainly fits well in their portfolio, but how much growth is it driving? Its hard to say.
Even so, Enterprise Strategy Group believes this was a smart acquisition. Virtualization blends well with Citrixs other product offerings, and server virtualization as a technology gets a boost by having someone well versed in the enterprise software market championing it.
When Citrix started giving away XenServer, there were plenty of critics claiming this was a desperate move. Babineau believes the opposite is true. When we see a vendor stop investing in technology from an acquisition, we know the acquisition failed. You dont see that with Citrix and Xen. Theyre committed.
The Advantages and Pitfalls of Open Source
How risky, though, is it to invest so much into open source, into something that anyone can build on?
First off, Citrix notes that only the core Xen engine is open source. Weve released many things back to the Xen community, but most of XenServer is proprietary, Wes Wasson, senior VP and chief marketing officer for Citrix said.
Plenty of other vendors are building around Xen, including Virtual Iron, Sun and Novell.
That makes it easier for a third-party support ecosystem to emerge, said Chris Wolf, senior analyst, Burton Group. Compare that to Red Hat going down the KVM path alone. Its great that they have a solution, but where is the rest of the stack and how do you integrate with other solutions?
According to Wasson, integration is indeed one of the advantages of Xen.
We believe that the power of virtualization is in helping customers extend their existing investments. We dont intend to take over the data center, he said. Instead, well help you extend the lifecycle of your servers. Well make managing PCs simple. We intend to transform data centers into delivery centers. Its very much a systems-based approach, but one that builds on the systems you already have.
Reading between the lines, Citrix has set its competitive sights squarely on VMware, which requires more systemic changes, and isnt worrying much about competition from other open-source vendors.
Another advantage that comes with Xen is that it saves Citrix the trouble of developing its own hypervisor something that VMware has poured a good deal of R&D money into.
Even so, the trick with any open-source business plan is finding a way to add value to the core project value that people will actually pay for.
Clearly, Citrix has added the most value to Xen, Babineau said. However, as Xen matures, it gets harder and harder to keep adding value.
Citrix seems to have thought this problem through, giving away XenServer early on and shifting their focus to management capabilities. The other thing to consider with XenServer is that the free platform becomes the beachhead for emerging virtualization efforts, such as virtual desktops and cloud computing.
The Next Big Test: Virtual Desktop Infrastructure
In the nascent virtual desktop market, Citrix is already doing well.
According to the Burton Group, Citrix and VMware have a nearly equal share in the VDI (Virtual Desktop Infrastructure) market. Gartner predicts that this market will take off soon, growing from $1.3 billion this year to $65.7 billion in 2013.
To put those numbers in perspective, this year VDI will make up less than 1% of the professional PC market, while by 2013 Gartner believes VDI will represent more than 40% of the market.
The server market, on the other hand, is still owned by VMware. IDC pegs VMwares market share at 78%, although with anywhere from 80-90% of the worlds servers left to virtualize, there are still plenty of servers out there to fight over.
XenSource is critical for Citrix in the VDI and cloud-computing markets, Babineau said.
He sees only three major players competing in the VDI market: VMware, Citrix and Microsoft.
I think Citrix will play a bigger role here than most people think. Success in this space could even force Microsoft and Citrix to rethink their whole co-opetition angle.
According to Wolf of the Burton Group, the XenSource acquisition means that the VDI market is Citrixs to lose.
Citrix has a good core architecture, and the driving factor of VDI adoption, the cost and complexity of managing desktops, isnt going to disappear, he said. This type of challenge plays to their strengths.
Another emerging virtualization battleground is cloud computing. In a cloud environment, you need server virtualization as a necessary first step, Babineau said. You can look at VDI as another critical step toward real-world cloud computing. Its an emerging battleground for vendors.
Of course, owning either of those early steps certainly helps position a player for the later ones. Citrix plays up the fact that the few existing cloud architectures out there, such as Amazon EC2, are based on Xen, making integration with Citrix own Xen-based offerings an easier task.
Even so, Citrix wont just be competing with VMware in this space. Microsoft, Cisco, IBM and others plan to play here.
Last month, Gartner predicted that cloud services revenue will jump to more than $56 billion this year, growing to more than $150 billion in 2013.
In a down economy, competition for anything actually generating revenue should be fierce. Citrix is well positioned, but theyll be up against giants.