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Building Virtual Empires: Page 4 of 5

As virtualization takes hold in the major ecosystems, the tip of the industry’s spear aims for a new target. The abstraction layers become the new constants, and take their place as platforms. Traditional elements beneath are commoditized, and later overrun by infrastructure purpose-built to support the new platforms, typically from startup competitors. Such efforts often make good venture investments. If you want additional examples beyond the aforementioned Network Appliance and Azul, consider what happened in the network when IP became the convergence layer -- propelling router companies such as Cisco and Juniper Networks Inc. (Nasdaq: JNPR) to prominence.

Meanwhile, opportunities also emerge atop the new platform to add value, with new vendors usurping the classic roles once filled by predecessors on the old platform. For a history lesson here, take a look at the IBM mainframe. Most anything worth doing was present on that system in the 1970s; the art since that time has been porting these capabilities to new platforms. This cycle has led to the rise and fall of many a sector leader, and quite a few good venture investments. Maybe the virtualized data center is really best described as a “virtual mainframe” after all.

Of course, the greatest upside of all flows from the virtualizers themselves, but these would-be disruptors are fewer in number and also bear the greatest risk. To appreciate the risk, you need to remember that perhaps the greatest engine behind virtualization is commoditization -- for by virtualizing something, you can commoditize it. Harnessing the gravity well of commoditization to create distinctive, high-value businesses is possible but requires great precision in the execution. It’s a little like using a black hole to slingshot yourself across the universe!

Sometimes the virtualizers become lost in the faster current of commoditization, their value propositions not significant enough next to the stark advances of the cheap or free. Other times, the virtualizers simply become commoditized themselves.

The virtualized data center contains all of these opportunities, and all of these risks. The key to winning in this fast-changing environment will be a careful discernment of which virtualizations are long-lived and extensible, and which are needless overheads. With the platforms in view, the rest should be “easy.”