VMware’s Pricing Dilemma

At the risk of stating the obvious, one of the most critical issues about VMware’s future has to do with its strategy around pricing. There are some good reasons for the company to reassess at this point. For starters, there’s downward pricing pressure as a result of zero/low cost entry-level offerings such as Hyper-V and hypervisor commoditization.

Add to that more competition in general with Citrix coming on strong and moving into other segments such as application and desktop virtualization, as well as offerings from IBM and Oracle. And let’s not forget what some have described as “recessionary” forces that negatively impact IT spending.

VMware has two choices: It can hold onto its cards and leave the current pricing structure intact. Or  it can take the advice of some analysts (such as Gartner’s Thomas Bittman) and lower prices, most likely sometime between now and the release of Hyper-V in a few months.

What’s the company likely to do? Some good clues came from recent Sanford Bernstein event where Diane Greene was asked some pointed questions about the company’s strategy. While she did some ducking and dodging on a few of them, my take was that overall VMware is intent on staying the course at least in terms of its high-end enterprise offerings. (The SMB segment is more of a sticky wicket.)

As evidence for the defense, Greene pointed out that ROI for many (96 percent) of customers is two years and in some cases as little as three months. She also pointed to the more "competitive" pricing that’s already been established for some entry level products.

But overall, the strategy that Greene and the company appear to be favoring is to maintain the current structure and compete not on price but price/performance, i.e. making few changes to the cost of existing offerings while continuing to add value to the product portfolio and in effect being the “gold standard” for virtualization technology innovation.

At the high end of the market, this makes a lot of sense. But in terms of SMB market penetration where Hyper-V is likely to do well, I’m not so sure. What do you think about the company’s approach? Are there chinks in the armor? Weigh in here or send me an email.

Posted by Tom Valovic on 06/16/2008 at 12:49 PM