Shakeup at VMware, Shakeout Next?

VMware

Diane Greene, who co-founded virtualization darling VMware (NYSE: VMW) in 1998 with husband Mendel Rosenblum and led its successful IPO, has left the company in an abrupt departure that has the industry abuzz.

The news was announced by the company’s board of directors today and carried all markings of a CEO who appeared to be pushed out by VMware’s parent company, EMC (NYSE: EMC).

In announcing that it had “made a change in leadership” with the departure of Greene as president and CEO, VMware’s board announced that Paul Maritz, a former Microsoft executive and underling of CEO Steve Ballmer, would take over as new president and CEO.

The company also said that revenues for the full year of 2008 would be “modestly below the previous guidance of 50 percent growth over 2007.”

News of Greene’s abrupt departure, along with the vague earnings warning, sent shares of VMware tumbling by more than 27 percent to $38.65 during regular trading today. Shares of EMC fell by more than 10 percent to $13.59.

Joe Tucci, chairman of EMC and of VMware’s board of directors, thanked Greene in a statement, saying she “guided the creation and development of a company that is changing the way that people think about computing.” The statement then turned to praise for her successor, calling Maritz a “leader in the software industry.

“He has decades of experience building one of the greatest franchises in software history, Windows,” Tucci’s statement said. “Paul was instrumental as part of the core executive leadership team in building much of Microsoft’s success.”

During his 14-year tenure at Microsoft, Maritz worked on Windows 95, Windows NT, Database, Tools and Applications. He left to found a cloud computing start-up,
Pi, which EMC acquired in February 2008. He then became president of EMC’s cloud division.

Clash of cultures?

Greene’s departure had the industry buzzing today over her management style, strategy differences with EMC, and what the new leadership means for the virtualization sector in general.

Greene was constantly at loggerheads with EMC, which bought her company for $635 million in 2004. This was because of her protectiveness towards the company she and co-founder Mendel Rosenblum, her husband and VMware’s chief scientist, had built.

“Diane has very strongly maintained VMware’s almost complete independence from EMC, which is totally unique in EMC acquisitions,” Illuminata analyst Gordon Haff told InternetNews.com. “I strongly suspect that a factor here was the degree of independence that VMware could enjoy.”

A spokesperson for VMWare declined comment and EMC was not immediately available for comment beyond the company press release.

In July of 2007, Greene helped lead VMware to a successful public offering of
an 11 percent stake, which ultimately netted the company about $1.1 billion.

Greene’s insistence on VMware’s independence meant EMC salespeople could not sell VMware bundled with their storage solutions, which was one of the reasons EMC had bought VMware in the first place. As competitors such as Microsoft ramp up their own virtualization offerings, industry observers expect to see more bundling of VMware in EMC’s products as well.

Despite her independence, Greene was also known as a consensus-builder, creating a collaborative ecosystem that embraced partners who included competitors of EMC such as Dell (NASDAQ: DELL), IBM (NYSE: IBM), Emulex (NYSE: ELX), and Hewlett-Packard Co. (NYSE: HPQ). This often left EMC frustrated, analysts noted.

“Throughout the past eight years, Diane has always been very cooperative with a lot of the different vendors out there,” Mitch Northcutt, a senior vice president at IT infrastructure consultancy GlassHouse Technologies, told InternetNews.com.

“That was very wise of her because her product was going to have an effect on the hardware and software sales of the Dells, HPs and IBMs, and without their support she could have run into a tremendous amount of resistance and negative publicity about virtualization.”

At the same time, “there was friction early on with EMC because IBM and HP were EMC’s biggest competitors and were also VMware’s biggest partners,” Northcutt said.

Greene’s cooperative approach led to VMware’s rapid growth — it has consistently grown at over 50 percent yearly, and first-quarter results, reported in April, showed a 69 percent growth.

That was good, but ultimately it led to trouble, creating the perception that VMware would continue to be a high flyer despite current economic conditions. So, when the faltering economy began to impact VMware’s sales, Greene got in trouble.

“Normally you cut companies some slack in bad economic times, but VMware was seen as being recession-proof so they didn’t get any slack,” Nicola Sanna, CEO at VMware partner Netuitive, told InternetNews.com.

That wasn’t the only problem Greene had, Sanna said. Competitors were flocking in and, at the same, time VMware didn’t have adequate virtualization and storage management technologies in place.

“While Diane has done a fantastic job in building the ecosystem, some were asking if she was too tentative in adopting management technologies within the product portfolio,” Sanna said. “They were asking when VMware will get into selling and offering management technology, which is very important and necessary in larger deployments of virtualization.”

It wasn’t that Greene and her managers were unaware of the problem. The trouble was, VMware was caught between a rock and a hard space: It didn’t want to change its model, which is very efficient, and it also didn’t want to compete with the big players such as CA (NASDAQ: CA) and IBM, who already have virtualization and storage management technologies.

Next page: Will Maritz bring pages from Microsoft’s playbook?

Page 2 of 2: What Maritz May Bring

Satoshi Nakajima, who worked for Maritz at Microsoft as lead software architect for Windows 95, said he was surprised to hear about the appointment. But he noted that Maritz’s knowledge of the enterprise software market makes him a good fit for VMware.

“Paul Maritz was the reason Microsoft shifted more of their business to the enterprise side. He saw there was a lot more opportunity to make money from enterprises than consumers as far as the revenue per machine Microsoft could make,” he told InternetNews.com.

Nakajima, who is currently president of Big
Canvas
, a startup working on software for Apple’s iPhone, said the shift could signal more deals to come.

“I think they (Microsoft) should forget about Yahoo and buy VMware,” said
Nakajima. Maritz knows Steve Ballmer, and who knows, this whole thing could
be setting the stage for Microsoft to do a deal,” he told InternetNews.com.

Meanwhile, there have been rumors that EMC is looking to sell its majority stake. Whether the shake-up stirs up the grapevine again is now up to Maritz to handle.

With Greene gone, VMware may lose some key staff. “I think it’ll be interesting to see what happens over the next quarter at VMware because there’s a lot of loyalty in the organization between her and her staff,” said GlassHouse’s Northcutt.

The question of whether the shake-up will see changes in the VMware ecosystem weighs on observers’ minds, and Netuitive’s Sanna issued a veiled warning about this: “I am sure they will continue supporting the partners because they need to play nice with the rest of the ecosystem,” he said.

One thing that is known about the South African-born Maritz is his
competitive nature. He may be remembered the most for reportedly saying Microsoft would “cut off Netscape’s air supply” back when Netscape had the leading Internet
browser. During the Department of Justice’s antitrust case against
Microsoft, Maritz denied ever
making the comment.

David Needle contributed to this story.

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