Earlier this month VMWare held its quarterly call with financial analysts to go over its most recent numbers. The results for the recently-closed December 2012 quarter were fine — in fact, more than fine, as they slightly beat the expectations of Wall Street. However, its guidance for the upcoming quarter, and for the upcoming full year, were well below where the Street was expecting, prompting a rapid sell-off and a drop of nearly 15% to its stock price.
The weaker-than-expected outlook confirmed something that investors have feared for quite some time now — VMWare’s core business is slowing down. The once-untouchable darling of Wall Street is now something that even the most bullish of Wall Street supporters are cautious on. Why? Well, you can look at the law of large numbers, market maturity, etc. but I think the biggest reason for the slow-down of VMWare is due to Microsoft.
Whether VMWare likes to admit it or not, more and more customers are looking at Hyper-V from Microsoft. Does it have all the bells and whistles of VMWare? Of course not, but it is perceived as “good enough” by the majority of customers I’ve interviewed on this topic. In fact, Silver Peak recently announced multi-gigabit acceleration for Hyper-V environments. According to Silver Peak, one of the reasons behind this release is that they are seeing a much more level playing field for hypervisors, where VMWare is no longer the de facto standard.
Microsoft’s bundling of Hyper-V into Server makes it almost a no-brainer for customers to try, as well. Since it comes embedded into Server, why not try it? Even if a customer decides that the performance characteristics of Hyper-V aren’t good enough for tier 1 applications, fine. Run all the tier 1 apps on VMWare and the rest of the applications on Hyper-V. Even if a customer chooses to run only its bottom quarter of applications on Microsoft, that represents a 25% install base loss to VMWare.
As a former IT person myself, I lived through this. Server has long been filled with features like DNS servers, file sharing, and other tools, all of which you can find better versions of on the market. So I would use the Microsoft flavor in situations where performance or breadth of features didn’t matter — small offices, lab environments, etc. — then use a more expensive, feature-rich vendor elsewhere. It’s there, so why not?
As this market continues to mature, I believe we’ll see many small and mid-size businesses find that Hyper-V quite adequately meets the virtualization requirements of their firm, and large businesses will likely deploy Hyper-V in branches, or even departmentally.
Make no mistake, VMWare is still the big cheese when it comes to virtualization. The company has been, and will continue to be, the key strategic platform in large data centers or companies that have bought into VMware’s “Software-Defined Data Center” vision. However, the majority of companies just aren’t ready to make this strategic shift yet, and are still in the consolidation phase of virtualization. So, this means the “good enough” feature set from Hyper-V meets the needs of the masses, where VMWare vision is addressing the early adopters, or at least advanced users of virtualization technology.
Don’t get me wrong, I’m not saying we’re seeing the end of VMWare, or that Microsoft’s share gain is a fait accompli, but this is the first time VMWare has faced a competitor like Microsoft. All of the other competitors, even Citrix, don’t have the marketing muscle or install base that Microsoft has. Sure, the Redmond-based company has become slow and isn’t the thought-leader it used to be, but their presence in a market — particularly when it’s tied to something with the install base of Server — can be disruptive to even the best of companies. If VMWare is to remain king of the hill, it will need to alter the way it goes to market and that starts with recognizing that Microsoft has arrived.