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Does VMware Need to Nip/Tuck Its Prices?

Clint BoultonReporter's Notebook: Can the newer server virtualization software vendors chip away at VMware's huge market share? Will VMware respond by slashing prices to keep customers?

Those are two of the questions I had after a briefing with Virtual Iron late last year. For those who aren't familiar with Virtual Iron, the company is a relative startup compared to the entrenched VMware.

Before December, Virtual Iron virtualized strictly Linux-based servers. Unlike the dominant VMware, Virtual Iron didn't have a leg to stand on virtualizing Windows.

That story changed last month with the release of Virtual Iron version 3.1, an enterprise-class virtualization platform that supports both Windows and Linux.

The company trumpets 3.1 as the "first commercial alternative" to VMware's high-end ESX Server. Virtual Iron promises to virtualize your servers at $499 per socket, compared to what it claims is a $2,789 price tag, plus the cost of Virtual Center management software from the incumbent.

With many folks in the industry turning to dual-core systems, figure $1,000 to run Virtual Iron 3.1 on a dual-core server and roughly $5,600 for VMware on the same machine.

To bolster its lower-cost, higher-value claim, Virtual Iron's marketing folks boasted that Virtual Iron 3.1 was chosen by digital archiving provider Mobius Management and The Charlotte Observer as a replacement for VMware products.

But let's go to the impartial observers. IDC analyst John Humphreys said Virtual Iron 3.1 "comes really close" to matching what VMware ESX does in terms of virtualization capabilities.

"The question I have is whether or not it has the same level of stability and performance that VMware has proven with ESX and all of the add-ons," Humphreys said. "If it does, and I'm a purchasing manager, why aren't I buying the one at 20 percent the cost?

To be sure, analysts have been pretty excited about the new entrants to this market.

Smaller guys like Virtual Iron, XenSource, SWSoft and Microsoft  (I know, I know -- but Microsoft is a smaller guy compared to VMware in this market) have essentially turned virtualization from an oddity to a commodity by entering the market at lower price points than VMware.

VMware responded last year, making its VMware Server free.

But let's not get carried away by Virtual Iron's FUD here; Humphreys estimates VMware owned 55 percent of the total virtualization software market through 2005 and 90 percent of the x86 server virtualization pie.

Virtual Iron pointed out two customers that boarded its ship from VMware; other analysts say there are no indications people are fleeing VMware en masse.

I queried Illuminata's Gordon Haff about Virtual Iron's pricing FUD versus VMware.

"Pricey or not, VMware clearly has a lot of customers for ESX Server," Haff told me. "In environments where it can deliver direct benefits -- such as reducing the number of servers -- it returns significantly more value than it costs."

But Haff didn't close the door on Virtual Iron or the other newcomers: "That said, it's not cheap, and the up-front cost may well have discouraged some buyers who are thinking in terms of acquisition costs rather than TCO. This creates at least a potential opening for someone like Virtual Iron to be the bargain-priced alternative."

Ditto for folks like Microsoft, XenSource and SWSoft, all of whom want to carve out nice big chunks of this multi-billion-dollar market, which IDC said grew 67 percent year-over-year from 2004 to 2005.

But should, and will, VMware cut its prices to keep the little guys from butting into its considerable business? That doesn't appear to be in the cards for a company that grew 86 percent year-over-year to $188.5 million in the third quarter of 2006.

Next page: Addressing the virtualization monopoly