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Will VM Pricing Topple VMware Juggernaut?

The virtualization market continues to heat up, exceeding expectations across the board for servers, desktops and appliances. However, will licensing and pricing concerns, along with competition, derail the growth of industry giant VMware?

It can be said with absolute certainty that virtualization is here to stay. After all, the virtualization market continues to grow at breakneck speed, and more and more vendors are getting into the game. Nevertheless, there are certain perceptions that threaten the growth of particular vendors in this highly contentious market--a market currently ruled by industry giant VMware.

Of course, VMware isn’t the only player in the growing field of virtualization products. Other industry giants, including Microsoft, Oracle, EMC (Citrix) and Red Hat, all have irons in the fire. Smaller vendors, such as Parallels, Proxmox and Virtual Bridges, are also players in the game.

With a crowded market, intense competition is sure to arise, with each and every vendor trying to topple VMware’s command of the market. However, the market may not be decided by the age-old rule of survival of the fittest. A very different factor is poised to upset the apple cart. In the case of virtualization, it will all come down to two primary factors: total cost of ownership (TCO) and return on investment (ROI). Both of those factors are heavily influenced by licensing and support costs--an area that can vary greatly among vendors.

Take VMware, for example. The company introduced new licensing methodologies last year that were based on the number of virtual machines being deployed, as opposed to the number of physical processors contained within a server. That proved to be a major change in how licensing could potentially affect customer costs and was perceived by many customers as a much more expensive way to deploy virtual servers.

However, the perceptions of increased cost did nothing to slow down the uptake of VMware products, and the company reported impressive licensing sales gains for the first quarter of 2012. Last week's announcement of its first-quarter results showed revenues up 25% year over year, operating income up 41%, and license revenues up 15%. For the year the company is predicting that revenues will grow 20% to 23% from 2011, and annual license revenues are expected to grow between 12% and 16%.

While that result may fly in the face of reason, there are other elements at work here beyond the perception of costs. It really comes down to value and the aforementioned factors of ROI and TCO.

VMware Customers tend to agree. "VMware offers excellent support, most likely because of the licensing fees paid to the company, and that support has an intrinsic value when it comes to making virtualization work effectively," says Frank Marshall, director of global retail support for The Estée Lauder Cos.

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