Can VMware pull off its second act?

Pat Gelsinger VMware Structure 2013

Pat Gelsinger, CEO, VMware Structure 2013 (c) 2013 Pinar Ozger [email protected]

In the early 2000s, VMware(s vmw) caught lightning in a bottle. First with VMware Workstation, and then with its even more popular server hypervisor, VMware rode a wave of chip breakthroughs from Intel(s intc) enabling businesses to cram more workloads on less hardware. That delighted IT buyers as much as it irked PC and server vendors.

The Palo Alto, Calif. company went from a feisty startup to a major data center power within a decade. It was talked about in the same breath as HP(s hpq), IBM(s ibm), and Microsoft(s msft) — all several times its size. Flash forward to 2013 where the question is whether VMware, which now faces assaults on all fronts, can catch that lightning in a bottle again in an era where Amazon Web Services could be called the VMware of this era.

But first, back to the beginning

“I remember it like it was yesterday,” recounted Joe Coyle, North American CTO for Capgemini, the big systems integrator.  When it launched in 1999, VMware Workstation was the first product to separate the desktop hardware or host from the operating system and application or client.

“I was able to load a disk with VMware and an OS and application and run it on any workstation. [VMware was] able to do at the workstation what IBM and DEC were able to do on mainframe [and minicomputer] platforms,” Coyle recalled via email.

VMware, founded in 1998, became an even bigger deal when it applied the same principles to the server. Until that time, virtualizing hardware was limited to the proprietary “big iron” machines but VMware allowed this to happen on “literally any Intel-based hardware at an attractive price point,” said Coyle.

The economics were indeed striking. Instead of buying one server per application, IT pros were able to double or triple up application workloads on the same box. It doesn’t take a genius to see the fiscal appeal of that.

The company had great, innovative technology and it arrived at the perfect moment. “VMware was in the right place at the right time. It let you pack more stuff on your compute and was there to ride the wave of Intel multicore chips,” said Dana Gardner, principal of Interarbor Solutions and a GigaOM Pro analyst.

And, whether by luck or design — probably both — VMware surfaced as Windows, Linux and a barrage of associated client software hit the market like a gale force wind. “There was not one person in the tech world at that time that was not closely following what VMware was doing,” Coyle said.


Tricky transition from server closet to cloud

So, VMware built a powerhouse around the ESX hypervisor and management tools. It’s had less success in desktop virtualization (its end-user computing effort) and has spent the last six months selling off non-essential businesses acquired just years ago — Wavemaker, SlideRocket, Zimbra — in service of its big software-defined data center (SDDC) initiative.

Given all those changes, last week’s VMworld 2013 show may be seen as the inflection point when VMware morphed from the server virtualization kingpin to a for-real cloud company. Or not.

CEO Pat Gelsinger used the show’s bully pulpit to launch storage and networking virtualization products, along with updated vSphere server virtualization. Together those products will serve as the of underpinnings to a software defined data center, which VMware hopes will power lots and lots of clouds. Its own clouds. Service provider clouds. Individual companies’ private clouds.

In the meantime, VMware also announced general availability of vCloud Hybrid Services  its current answer to AWS and Microsoft Azure, to mixed reviews. While some said VCHS — which promises not just the usual IaaS perks but also “desktop-as-a-service” and “disaster recovery as a service” — should keep Amazon and Microsoft up at night  — most saw VCHS as a late response to the burgeoning power of Amazon and Microsoft clouds. The desktop and DR perks are nice, but they need to be proven in the field. And they need to be price competitive — meaning that VMware needs to loosen up on its pricey software licensing policies.

VMware said the right things: that VCHS will enable “seamless” interoperability between on-premise data centers and VMware-managed clouds. That’s a big promise and if it bears out could be attractive. But VMware had already vowed much the same thing for its older vCloud Director cloud management software for third parties. And that didn’t work pan out. Even VMware execs concede that vCloud Director didn’t work out as planned but promise better things for the next release. The hard truth: Seamlessness is easy to say (well, maybe not that easy) but very hard to deliver.

VMware’s problem here is that it’s attacking a market — hybrid clouds for enterprises that want to preserve their current investment in IT but also scale up into a cloud when workloads spike — that is already on every other vendor’s radar, including IBM, HP, Red Hat, Microsoft. And folks who don’t think Amazon Web Services is attacking the enterprise market have another think coming.

Advantage: VMware

VMware’s strength is its server virtualization know-how, which is applicable on-premises or in cloud; its huge roster of enterprise accounts; and close ties to EMC and Pivotal, the company formed by EMC and VMware to launch a big-data focused Platform as a Service.

According to one VMware service provider partner, who privately derides VMware’s vCloud Director and the company’s overall pricing and licensing model, concedes that “to this day,” VMware’s ESX hypervisor is the best in the industry and VMware leads in the enterprise.

And even some VMware critics say if its new NSX networking virtualization move pays off, it could be a game changer. VMware’ s pitch is that companies that run VMware’s NSX IP atop their existing hardware — whether it’s from Brocade or Juniper or even Cisco — can reconfigure and manage that gear on-the fly via VMware’s software. Cisco, which was pointedly left off the slide of NSX partners at VMworld, is in this fight with Insieme, but Cisco has a huge networking hardware business to protect; VMware does not.

Disadvantage: VMware …

The flip side of the coin is that VMware’s server virtualization lead is under siege by Microsoft Hyper-V, KVM (backed by Red Hat and others) and Xen (backed by Citrix and others) — all of which have made strong strides. And all those VMware enterprise customers? They’re none too thrilled with VMware’s pricing and licensing. Many remain miffed about the company’s “VRAM” tax — price hikes — a year after they were repealed. Hardly anyone seems to expect that VMware’s cloud will be able to compete with Amazon (or Microsoft) on price.

VMware and Microsoft share many accounts and Microsoft is pitching those Windows-centric shops hard to use the Hyper-V plus System Center combo while open-source-oriented businesses are more likely to go with KVM or Xen and related stacks than VMware.

And while it’s great that VMware has EMC’s heft behind it, there’s the whole question of whether it really is an independent entity or becoming more of a proxy for the parent company, which retains an 80 percent ownership stake. A steady flow of EMC execs into VMware, starting with Gelsinger last year and the latest being CTO Chuck Hollis, could indicate a tightening of the apron strings.

More concerning is that some key VMware execs — including Bogomil Balkanski and Mike Nelson (a VMware Fellow and a force behind vMotion) have decamped– the last two to a new startup by VMware co-founder Diane Greene (pictured above). (Greene was fired by EMC chairman Joe Tucci in 2008 and replaced by Paul Maritz who is now CEO of EMC/VMware spinoff Pivotal.) Some of this is the normal ebb and flow of executives at a maturing company but there is also a nagging feeling that top-flight techies see more opportunity elsewhere.

VMware and EMC ties that bind

VMware’s whole SDDC strategy stresses software control of hardware components — servers, networking gear and storage. While VMware clearly intends to “disrupt” hardware competitors including Cisco, its hard to ignore that it is 80 percent owned by a legacy hardware company.

Gartner analyst and long-time VMware watcher Chris Wolf said its ties to EMC restrain VMware from really, really going for it when it needs to. Said Wolf via email:

 “So far, the software-defined data center is still positioned as requiring enterprise-grade hardware. That’s not how Amazon, Google, and others do it. Look to the public cloud and the major providers are building stacks where nearly all of the value is abstracted from software. For VMware to offer cost competitive solutions comparable to the public cloud, it will have to show customers how they can build data centers where nearly all value is in software. When you place a premium on hardware and software in your architecture, you will never keep up with the public cloud from a pricing perspective.”

But VMware’s biggest problem is that it is no longer the disruptor, but one of the disrupted. AWS is doing to VMware what VMware did to the legacy IT providers in the late 90s and early 2000s. It lets IT departments do stuff better, faster at a lower cost. VMware, like Cisco(s csco), like HP, like IBM, is in the position of having to cannibalize some of its own cash cow products in order to remain relevant. What’s unclear is which of these companies will do the best job of that.

Said one long-time data center expert who did not want to be named because he works with VMware: “Technically VMware can do the work.  The question is whether they can get the business model to work. Can they make money they used to from enterprise VMs?”

Zillion dollar question: Can anyone beat Amazon?

Capgemini’s Coyle summed it up: “AWS is the VMware of cloud.” In his view, Amazon has such a lead that it would have to make a series of massive mistakes to blow it now. For VMware to make a dent, it will have to keep its current enterprise customers happy, while persuading new customers to bank on its cloud (instead of AWS), and it will have to strategically partner in order to offer the scale and price of AWS going forward. Those are all humongous ifs for a company that seems to have irritated more than its share of service provider, hardware and software partners. Joe Baguley, VMware’s CTO for EMEA will speak about VMware’s strengths and opportunities in cloud at Structure:Europe in two weeks.

Ironically, what gives VMware breathing room is that none of the incumbent companies or even upstart AWS has cracked the code to building what companies see as a truly enterprise-class cloud. But they’re all trying. That’s why Amazon’s contested $600 million contract to build the CIA’s secure cloud is such a huge deal. If AWS can build a a cloud that’s secure and private enough for intelligence agency standards, it will jump higher on the short list of vendors approved for mission-critical enterprise work loads. No wonder IBM challenged the contract.

VMware is betting that won’t happen and that it will be the enterprise cloud of choice going forward — catching lightning in a bottle once again. At this point, given Amazon’s head start and the money other legacy IT vendors are spending, that’s a long shot.