VMware Feeling Pressure as Virtualization Becomes a Commodity

The supply of stock investors willing to pay premium prices for EMC (NYSE: EMC) subsidiary VMware (NYSE: VMW) seemed to dry up around Halloween—perhaps, analysts are saying, because they’ve started to realize that the supply of companies willing to pay premium prices for VMware’s virtualization software isn’t infinite, either.

The seemingly unstoppable stock, whose rise had been more or less uninterrupted since the company’s spectacular August 15 IPO, actually stopped on October 31, peaking at about $124. By this Monday, November 12, the stock had lost almost 30 percent of that peak value, declining to about $90.

Then came Monday’s news from Oracle’s Openworld trade show in San Francisco that the database giant planned to release open-source virtualization software called “Oracle VM”—software that the company claimed is “up to three times more efficient than existing products from other vendors.” Based on the open-source Xen hypervisor, Oracle VM is available as a free download starting today.

VMware plunged another 15 percent on the news, bottoming out around $76 before closing the day Monday at $80.36. Yesterday, VMware underwent a partial recovery, buoyed by the release of Fusion 1.1, an update to the company’s popular desktop virtualization package for the Mac, and VMware Server 2, the company’s free server virtualization product for small and medium-sized businesses. The stock ended the day Tuesday at $90.63, shaking off the Oracle wobble but still dramatically off its October highs.

VMware’s newfound volatility is in part a reflection of the stock market’s own recent wackiness—another down day Monday followed by a strong uptick yesterday. But analysts say it also may be a sign that the company’s once-near-exclusive claim on the idea of virtualization is wearing off, and that investors are beginning to see the company as just one player in a larger market for the technology. Virtualization helps make corporate servers more efficient by allowing multiple applications to run on multiple operating systems on the same machine. But while VMware invested years of development in its proprietary virtualization software, the basics of virtualization are duplicated by the free Xen hypervisor, which is at the core of products from VMware competitors Virtual Iron, XenSource (recently acquired by Citrix), and, now, Oracle.

At the same time, Microsoft is looming on VMware’s horizon. On Monday, the Redmond, WA software giant announced packaging and pricing information for Windows Server 2008, which, for a small added cost, will include a virtualization feature called “Hyper-V.”

VMware has a bit of breathing room here, as Windows Server 2008 isn’t due to launch until late February. Still, “VMware feels attacked on two sides,” believes Dan Kusnetzky, an independent software consultant known as “The Virtual Man” for his ZDNet blog Virtually Speaking. “On one side, Microsoft is beginning to attack using the same strategy they’ve used before—just add a new feature to their operating system and increase the overall price just slightly,” Kusnetzky told me yesterday. “As companies such as Quarterdeck software or TGV know, this is a very effective strategy.” (Networking software company TGV was absorbed by Cisco in 1996, and DOS utilities maker Quarterdeck disappeared into Symantec in 1998.)

“On the other side,” Kusnetzky continues, “Oracle, Citrix/XenSource, Virtual Iron, SWsoft, and Qumranet are all attempting to bring the forces of open source software to bear and defeat the mightly VMware.” In their marketing messages, these companies are able to point to the low cost of open-source software and the deep experience of the open-source development community, Kusnetzky says.

In short, VMware may have already squeezed all the juice it can from investors’ post-IPO giddiness over virtualization technology. “Many in the industry feel that VMware will shortly no longer be able to charge premium prices for what is becoming commoditized software,” Kusnetzy says. Barring disaster, of course, VMware will still stack up as perhaps the most succesful technology IPO of 2007. But its honeymoon seems to have ended along with Daylight Saving Time.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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