VMware Feeling Pressure as Virtualization Becomes a Commodity

11/14/07Follow @wroush

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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  • Alan

    I think your headline is backwards. It’s the other guys that are feeling the pressure to produce a product tomorrow that is equal to what VMware is offering today. While they attempt to add features VMware is hard at work on the next generation of virtualization tools.

  • Jim

    Comparing VMware with the other virtualization software is like comparing fruit, but it isn’t the same as comparing apples with apples. VMware is a mature product with much more functionality. Why would a business buy cheap and get less bang for the buck. I have to give businesses more credit than that. They will buy virtualization to make huge productivity gains. That’s where VMware has the market locked up.

  • Nathan

    You also left out that while Windows Server 2008 isn’t due until February 2008, “Hyper-V” isn’t due out for 180 days after that.
    Also it won’t even have the features that ESX 3.0 had a year ago, putting it more than 2 years behind in technology.

  • LP

    If a non-tech savy investor wanted to buy VM stock when would be the best time? Do you all think that it will continue lock up the market or are we close to the real value of the stock?

  • Robert

    VMware makes great technology, but it costs way too much. Plain and simple. I work for a Fortune 500 company and while we’ve been using VMware for a while, it’s only out of necessity. We can’t wait for some real competition because VMware has been enjoying being the only solution in the market for years and price gouging.

    Hypervisors will DEFINITELY be commoditized very soon now (we’re on the trailing edge now) and the prices will finally start to drop. No, I don’t own VMware stock, but if I did, I’d be selling now.

  • Jimmy

    This all sounds like it could be the end of the rise of VmWare. However, myself being in the IT field. I can assure you that VmWare is light years ahead of their competitors. And news like Oracle offering Freeware will not make IT Departments move to Oracle. I cant say 2 years down the road VmWare wont have tough competition. But as their competitors develop new technology, VmWare is hard at work doing the same. So to all the Non-Technical investors. Look at the facts, VmWare has doubled their profits every year for last six years or so. 100% of Fortune 100 companies use VmWare, 85% percent of Fortune 1000 companies use VmWare. VmWare is here to stay and teh share prices will continue to rise. My suggestions for buy price would be 87.00 and i will see all of you at $140/share after the earning reports.

  • http://johnmwillis.com John Willis

    “Why would a business buy cheap and get less bang for the buck.”

    For example, Google and Amazon. See

    http://www.johnmwillis.com/wp/google/should-vmware-worry/

  • Bernie

    Too bad people are forced to fill the white space on their websites with regurgitated nonsense.

    I love this sentence –

    “But its honeymoon seems to have ended along with Daylight Saving Time”

    You must be patting yourself on the back for that one!

    Including Oracle’s pathetic attempt at entering the virtualization market underscores the fact that this space is very much misunderstood. Find me one enterprise customer who will even consider deploying on Oracle VM. It’s a joke. Next you’ll tell me that mySQL is just as good as Oracle 11i.

  • Jim

    John,
    My answer to your reply shown below in quotes is: Even big and good companies make mistakes…
    RE:
    “John Willis 11/14/07 1:40 pm
    “Why would a business buy cheap and get less bang for the buck.”

    For example, Google and Amazon. See

    http://www.johnmwillis.com/wp/google/should-vmware-worry/

  • http://johnmwillis.com John

    I guess you missed the part about “Google’s Three Rules”. Cheap and failure are part of their design. When you are building data centers that have over million-core’s you can’t afford to go expensive. Amazon, Google and Rack Space are changing the game and are on the forefront of turning computing power into a true commodity. IMHO, ESX (1 million+) licenses are not going to be part of that game.

  • Robert

    eWeek thinks VMware is going the way of the dodo bird…

    http://www.eweek.com/article2/0,1895,2216435,00.asp

  • http://johnmwillis.com John
  • http://www.meganet.net Paul Joncas

    It is true VMWare has a great product, but they are no longer alone in Virtualization arena. My Company spent a year evaluating VMWare and Virtual Iron after visiting Linux World, and chose Virtual Iron.
    VMWare has some bells and whistles that others don’t have at this time, but VI is equivalent when it comes to the key features and capabilities that are the core reason for deploying a virtualized server array. With the release of 4.1 it has only gotten better with less overhead and more features. We are running Virtual Iron in a production environment and it has held up to the demands of our business. I strongly suggest a look at VI before you make the leap to VMWare.

  • J

    Hypervisor technology is becoming a commodity and will soon make it to the hardware level as we are already seeing and VMware is well aware of this. Everyone is focusing on virtualization however they are missing the big picture. The real value is the ability to manage all these virtual machines to fulfill business objectives. (i.e. Fault-Tolerance, Disaster Recover, DRS, High Availibility, cost reduction, etc.) That is the real value and this is ability is not a commodity and VMware is really the only company that does this and does is well. Oracle is just Xen, which does not offer this, Viridian is a non existant product as a date and that pretty much sums up any possible competition. VirtualIron works very differently and is only practical for certain application.

  • JVirtual

    Dan Kusnetzky needs to install a virtual product and figure out what the heck he is talking about. lol. I run one of the largest data centers in the world. VMware’s product is solid, stable, and is on our roadmap for at least the next 3 years. I am not going back to the drawing board to choose a cheaper product. Give me a break.

  • F

    Did anyone take Jimmy’s advise to buy at 87?
    because today’s price is 73. Anyone who thinks that any company has a lock on any technology is fooling themselves. Oracle’s introduction into the VM world does have an affect on EMC’s VM product. Companies who use Oracle will in fact move to their VM product, first because it works, and second just like people moved away from IBM, because of price

  • SRandy

    I am surprised at the number of articles (even the one in eWeek) which have no basis in the reality of the IT world. I am very much a proponent of Open Source software. After comparing and testing VMWare and Xen, much to my dismay, there was no comparison. VMWare was by far the superior product in performance and capabilities. The OpenSource compeditors are not going to destroy VMWare, just as Linux has not destroyed Windows in the desktop or server market. This is the same scenario with mySQL and Microsoft SQL. mySQL is free; how does MSSQL, Oracle and the like stay in business?
    This kind of nonsense is what happens when investors try to comment about an area they have little or no understanding of.

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