VMware Killed By Commoditization? Not So Fast

VMware reported third-quarter results on Oct. 21 that said it grew 14% over its third quarter last year. That sounds about right for a company under pressure from Microsoft's free Hyper-V and open source code on one side, and Amazon Web Services and other cloud suppliers on the other.

It's called the commoditization of the virtualization market; everyone's heard about it. And I'm here to tell you, it isn't happening, at least not in the way that Wall Street analysts assume it is. It's coming, as surely as the next ice age, but VMware keeps putting new management products on top of the data center's virtualized environment. It's started reaching out to manage other types of virtual machines. In various ways it stays three steps ahead of commoditization's noose.

How can that be? Don't market survey figures show Microsoft's Hyper-V gaining faster in the marketplace and pushing out VMware's ESX Server? Yes, in some cases, but not as much as the commoditization theory would suggest. Hyper-V supplies solid virtualization, and it's being implemented in remote offices, business units and divisions that don't need all the bells and whistles of a VMware vSphere environment. So market research from various sources shows Hyper-V growing faster than ESX Server.

But virtualization is more than the adoption of a hypervisor at this point. Its devotees have moved from server consolidation to sophisticated virtualization, a kind of pre-cloud environment where they wish to manage servers, storage and networking all as flexible, pooled resources. They want to move virtual machines around as they try to juggle host workloads, shut down the electricity consumption by underutilized servers and build in a disaster-recovery failover plan.

[ VMware execs explain why overlaying a physical network with a virtual network makes sense. See VMware Execs Talk Virtualized Networks. ]

Much of this can be done by those skilled at using Windows Server and Microsoft's System Center with its Virtual Machine Manager component. But Microsoft has a lot of irons in the fire as it tries to revive its prospects as a consumer software company. Windows Server has a remarkable presence in the data center, frequently constituting half or two-thirds of the servers there, but VMware is often the company that manages those Windows Servers that are virtualized.

VMware popularized the concept of the software-defined data center, and sometimes sounds like it's the only firm that can envision how it will be built (with its management suite in the driver's seat). Even so, hypervisor market-share numbers disguise the fact that the money is in the management. And VMware is relentlessly focused on management. Think vCenter Operations Management or vCenter Log Insight.

And that's why VMware's revenue, minus the expenses of spinning out Pivotal, grew at a pace in Q3 more like 19% in than the reported 14%. That's still off its highs in 2010 and 2011. But VMware is a much larger company than it used to be. Nineteen percent growth of what is likely to be a $5 billion company in 2013 leaves it with an R&D budget capable of sustaining its leadership position, or at least continuing its output of new management products. It's that target that its competitors must shoot for. It's a moving target. And it's hard to see a Microsoft, preoccupied with producing a tablet to compete with the iPad, catching up.

At the Cloud Connect show in Chicago, Mathew Lodge, VMware's VP of cloud services, was hit with a question on how VMware was getting painted into a corner by Hyper-V, open source Xen and KVM.

"This whole thing about commoditization is overdone," he responded. VMware is giving businesses more flexible control over their data centers, and through it, they're able to marshal resources more quickly for the moves they want to make.

"We're turning the software infrastructure into the software-defined data center. Software is the way that people are getting new products to the market more quickly," he said.

That's a simplification, but it's one that keeps a lot of VMware customers hanging around to see how it pans out.