For VMware, an Uncertain Future

In Las Vegas later this week at VMworld, a trade show that celebrates the red-hot technology known as virtualization and it most visible proponent, VMware (s VMW), many will wonder what the future looks like for the company that single-handedly created a market for this technology.

Going into the show, the company that prompted many copycats and even more innovators to try their hand at virtualization faces a plethora of challenges, among them the threat of commoditization of its core product, increased competition and fiscal uncertainty. But the most important question is also the hardest one to answer: Did EMC’s (s EMC) meddling kill the golden goose known as VMware?

2008 has been a year of uncertainty for the Palo Alto, Calif.-based company that was previously one of the hottest technology startups around, hiring engineers at a clip faster than Google. Following a wildly successful IPO in August 2007 that valued the company at $29 billion, shares of VMware continued to rise as interest in its products grew.

As is always the case, nothing lasts forever, and earlier this year a tempered forecast for revenue and profit growth sent VMware’s stock reeling. The share price drop made the already strained relationship between VMware and EMC Corp., which owns 90 percent of the company, even more tenuous.

The internal tensions boiled over and led to the firing of co-founder and CEO Diane Greene. She was replaced by Paul Maritz, a former Microsoft executive whose startup Pi Corp. was acquired by EMC when the storage company was trying to develop a cloud computing strategy.

The move was followed by the departure of Dr. Mendel Rosenblum, VMware’s chief scientist and co-founder as well as Greene’s husband. Another senior executive recently returned to his previous gig at Oracle. The exodus of these and other senior members of VMware’s management team is making folks on Wall Street nervous.

Yet such nervousness comes at a time when virtualization has a strong wind at its back. People are increasingly looking to virtualization to boost the utilization of their servers, which has remained at a notoriously low level. Meanwhile the costs of operating servers — whether in corporate or Internet data centers — is getting out of hand, mostly due to rising power costs, making virtualization a must-have technology for all companies.

According to a recent survey conducted by Avocnet, an IT management services company, 33 percent of companies polled had implemented server virtualization, particularly for energy-saving goals. And this trend is only going to gather momentum.

For now, VMware is the king of the heap; it enjoys an enviable position in the virtualization market, similar to that of Cisco in the market of routing and switches. But remember Juniper? It built a massive business by being an alternative to Cisco.

A dozen or so companies are currently going gaga over virtualization, among them Oracle, Sun, Hewlett-Packard and of course, Microsoft. VMware was two years ahead of all of them, but as key people leave and its technology becomes commoditized, EMC’s crown jewel is losing its luster.

I think the biggest threat to VMware market is Microsoft, which despite being a latecomer is pretty serious about this market. Given that virtualization is a space that is closer Microsoft’s core OS business, one can be assured that the barons of Redmond are going to do their best to compete with VMware.

And as if that weren’t enough, VMware’s hypervisor technology is facing an open source threat. Last week, Sun Microsystems open sourced its virtual machine, following closely on the heels of Red Hat, which acquired Qumranet earlier this month.

My colleagues at OStatic summed it up nicely when they said, “Virtualization, is, at its core, headed for software utility status, and will likely be wrapped into operating systems, and increasingly adopted in open source form for free. That spells big trouble for VMware — with many historical precedents causing one to wonder about the company’s business.”

One man who understood these changes was Rosenblum. In an on-stage conversation at our Structure 08 conference, when asked about competition, Rosenblum said, “The bar to entering is getting fairly low. VMware’s value is managing the data center and reliability, etc.”

And in an earlier conversation with me he said, “VMware clearly is going to have competition. Sure it was nice when we were all alone, but we are very different from these other companies…What we are doing is basically coming up with a new way to run the data center. So from that perspective, we will continue to have something better than others.”

Too bad he isn’t going to be around to make that happen. I’m sure the new management will come up with a competent strategy, the question is when — in other words, how soon can they once again distance themselves from the pack?

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