Dan's Take

Has VMware Reached a Crossroads?

The latest earnings report raises important questions.

• By Dan Kusnetzky
• 02/02/2016

Virtualization Review editor in chief Keith Ward and I were discussing some of the statements made by VMware's CEO and CFO in their recent earnings conference call. VMware announced that some of its executives were leaving; it was trimming 800 jobs; and it issued "worse than expected" guidance for the Q1 and Fiscal Year 2016 financial periods. It also discussed the potential impact on the company of Dell's acquisition of EMC.

Does it portend serious problems for the company? VMware's initial focus was virtual machine software (VMS), one of the five different types of processing virtualization in the Kusnetzky Group model. That's still the primary focus of the company, even though the market has been changing rapidly.

Premium Offering, Premium Price
VMware's approach when competing in the market for VMS and other types of virtualization technology is to offer an expansive set of features focused on building and offering a complete technology stack at a premium price. While the company works with technology offered by others, it's doing its best to capture complete computing environments. It's challenged by the fact that are open source alternatives in many of the markets in which it competes.

For example, in the VMS market, alternatives such as Xen and KVM are available from many other suppliers. They come free as a standard part of Linux distributions, or as commercially supported products. Because of that, VMware's finding it hard to maintain a growing steam of revenue in the commodity VMS market.

Out of Focus?
Although there are seven layers of virtualization technology in use in modern data centers, and five different types of processing virtualization technology, VMware spends most of its time and energy focused on VMS. But the industry is coming to understand that VMS isn't always the best choice to create a virtual environment (see this article for a more in-depth review of that trend.)

We're seeing greater interest in another type of processing virtualization technology, which I call operating system virtualization and partitioning (OSVP). This is mostly happening in the area of containers, and being driven by enterprises seeking a more optimized computing environment; they don't always want or need the flexibility VMS offers. VMware, knowing it needs to have a presence here, now offers support for some of these types of technology. However, where there's no pressure, it continues to lead with VMS.

Virtual Dependencies
The most effective use of VMS often requires the use of other layers of virtualization technology; access, application, network, and storage virtualization are likely to be required, depending upon what enterprises are doing.

But, although VMware has developed or acquired technology in all of those categories, the company continues to lead with VMS in its messaging, so enterprise decision makers could be forgiven for not knowing about VMware's products in those other areas. It makes for a much harder sell.

Consider VMware's Workspace Suite, for example, which combines access virtualization, application virtualization and processing virtualization. The same business requirements could be addressed by a combination of open source projects or products from Citrix, HP, Microsoft or Oracle. But VMware's increasingly pushing enterprises to replace their existing datacenter technologies with its own, even though that change might require additional investment by its customers.

'Stacking' the Deck
Enterprise use of managed service providers and cloud service providers often mean that the service provider choses the stack of software to offer. If the enterprise doesn't specifically request VMware's stack of virtualization, security and management software, the service provider is likely to offer low-cost, open source alternatives rather than paying a premium for VMware's offerings. The service provider, after all, makes its living on the margin between what their services cost to deliver and what they can charge the enterprise. Their margin is greater when they can use lower-cost hardware, software, communications services, power and so on.

Challenges on All Fronts
Although the conversation rambled over a number of other areas, it's easy to see that VMware is facing challenges in each individual virtualization technology market and in the other markets in which it plays, such as software development, Web and cloud frameworks, management and security.

Can VMware continue to use the same strategy it's used in the past -- to be the premium-priced supplier of technology -- in every market in which it competes? The answer is very likely to be No. VMware, like all other suppliers, has to acknowledge the realities in each dynamic market in which it competes. If it can't change with the markets, it's likely to lose share to those who can.