Does VMware Need to Nip/Tuck Its Prices?

Reporter’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

Page 2/2

Reporter’s Notebook: Part of the job of Raghu Raghuram, vice president of product and solutions
marketing for VMware, is to beat back the FUD and answer such questions in
an increasingly competitive environment.

VMware currently has no plans to slash prices.

Raghuram told me that VMware products are priced appropriately, delivering a
return-on-investment usually within six months of the software license
acquisition.

He said most customers report high satisfaction with the ongoing economic
benefits they realize, such as a 70 percent hardware savings, the roughly
$600 per server per year in energy costs, or the operational cost savings
from 30-minute provisioning.

Yet Virtual Iron folks counter that VMware’s “monopoly” over the server
virtualization market for the last several years has “created a lot of
anxiety and frustration” among its customer base.

But Pund-IT analyst Charles King said the only way VMware will yield and cut
its prices is if Virtual Iron, XenSource, Microsoft and SWSoft make some
serious inroads into its massive market share.

That’s a tough task against a proven company that expects to break the $200
million revenue mark when EMC
 announces Q4 earnings later this week.

“[VMware] has executed pretty amazingly over the last three years,” King
said. “When competitors go against that, you can either deliver a product
that is significantly better or significantly cheaper. By definition I
don’t think any of the competing offerings are better than VMware ESX.”

If the competition won’t be rooted in price or performance, then it will be
about the technological innovation going forward in the virtualization
space.

“What economic value remains will be in higher-level virtual infrastructure
services, such as load balancing, disaster recovery and virtual appliances,”
Haff said.

Indeed, virtual appliances, a virtual machine comprised of an operating
system running a pre-configured application, seem to be the next big
battleground as vendors seek to chart new territories.

Designed to further consolidate hardware acquisition costs, virtual
appliances are meant to replace traditional server appliances, including
e-mail servers and security appliances.

Virtual appliances were, of course, introduced by VMware, who has partnered
with several vendors, including Red Hat
, Novell , Oracle  and BEA Systems  in this effort.

Clint Boulton is managing editor of internetnews.com.