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Good Business Model During a Gold Rush? Sell Picks and Shovels

I met with Hugh Kelly of Canton, Massachusetts based Network Engines this week to discuss his company???s virtual appliance solution. Their business model doesn???t actually sell appliances; Network Engines offers a service to software vendors, appliance-izing solutions for other development houses. You say you already have a great security or management product but lack the in-house expertise to integrate it into a turn-key solution for ESX? You could give these folks a call...
Their pitch is pretty solid - vendors can focus on their core competencies and gee-whiz products, letting Network Engines build and customize the underlying hardened LINUX platform (based on the RedHat 2.6.19 distro) into a nice tidy bundle. They???ve expanding on their experience in the physical appliance market with vendors like EMC, Surf Coast, Covast, and Sophos to move into the exploding virtualized appliance space. Historically most of Network Engines' customers have simply not wanted to be in the hardware business; they developed integrated hardware/software appliance solutions and took a fixed fee per box sold. Their revenue model takes a slice of every appliance that goes out the door, physical or VM, to minimize their partners??? up-front development costs. To give an idea on pricing, they???ll clear $500 on a partner???s sale of a $5k virtual appliance. Those profit-sharing slices added up last year to the tune of $120 million in revenue. Not bad for selling picks and shovels.

Swivel Secure is Network Engine???s first existing client to make the physical-to-virtualized move with their PINSafe authentication appliance for ESX. More ???p-to-v??? announcements should be coming in the next few months, and my bet is they???ll be seeing a number of new partners signing on for the service to help build, package and keep up with the pesky ongoing maintenance (e.g. care, feeding, patching) of virtual appliance offerings.