Will VM Pricing Topple VMware Juggernaut?

It can be said with absolute certainty that virtualization is here to stay. After all, the virtualization market continues to grow at breakneck speed, and more and more vendors are getting into the game. Nevertheless, there are certain perceptions that threaten the growth of particular vendors in this highly contentious market--a market currently ruled by industry giant VMware.

Of course, VMware isn’t the only player in the growing field of virtualization products. Other industry giants, including Microsoft, Oracle, EMC (Citrix) and Red Hat, all have irons in the fire. Smaller vendors, such as Parallels, Proxmox and Virtual Bridges, are also players in the game.

With a crowded market, intense competition is sure to arise, with each and every vendor trying to topple VMware’s command of the market. However, the market may not be decided by the age-old rule of survival of the fittest. A very different factor is poised to upset the apple cart. In the case of virtualization, it will all come down to two primary factors: total cost of ownership (TCO) and return on investment (ROI). Both of those factors are heavily influenced by licensing and support costs--an area that can vary greatly among vendors.

Take VMware, for example. The company introduced new licensing methodologies last year that were based on the number of virtual machines being deployed, as opposed to the number of physical processors contained within a server. That proved to be a major change in how licensing could potentially affect customer costs and was perceived by many customers as a much more expensive way to deploy virtual servers.

However, the perceptions of increased cost did nothing to slow down the uptake of VMware products, and the company reported impressive licensing sales gains for the first quarter of 2012. Last week's announcement of its first-quarter results showed revenues up 25% year over year, operating income up 41%, and license revenues up 15%. For the year the company is predicting that revenues will grow 20% to 23% from 2011, and annual license revenues are expected to grow between 12% and 16%.

While that result may fly in the face of reason, there are other elements at work here beyond the perception of costs. It really comes down to value and the aforementioned factors of ROI and TCO.

VMware Customers tend to agree. "VMware offers excellent support, most likely because of the licensing fees paid to the company, and that support has an intrinsic value when it comes to making virtualization work effectively," says Frank Marshall, director of global retail support for The Estée Lauder Cos.However, the question still remains: Can VMware hold off the challenges of Microsoft and Oracle, which are basically offering hypervisor technology for free? What about Citrix, which is revamping fees to lower the price of virtualization?

Microsoft is on the offensive because of the forthcoming upgrade to Hyper-V coming with Windows Server 8. New features put it "on par and in some ways better than VMware," according to Aidan Finn, a Microsoft IT consultant in Dublin, Ireland. He says Hyper-V outstrips VMware in inexpensive server-attached storage, aspects of live migration and failover for site-to-site disaster recovery. Plus, Hyper-V will have capacity access to more virtual CPUs than ever before.

Those improvements will be sure to add to the challenge that Microsoft is making against VMware. According to research firm IDC, Microsoft’s Hyper-V grew 62% last year, compared with VMware’s ESX's 21% growth and Citrix's 25%. Gartner is also predicting a big year for Microsoft. The research company projects that by next year Hyper-V will account for 27% of the market, up from 11% two years ago. Within that projected 27%, Gartner says, Microsoft will have captured 85% of all businesses with less than 1,000 employees that use virtual servers.

That yearly growth proves significant, especially when one considers that the number of X86 servers being converted to virtual servers is also growing dramatically. Gartner says x86 boxes will grow from 11 million virtual machines in 2009 to more than 55 million next year.

Meanwhile, Citrix, which Gartner projects will hold 6% of the market next year, is making strides working off its base of virtual desktop customers and recent assertions that it will drop prices to be less expensive than traditional physical desktops. Citrix’s latest, XenServer 6.0, is purported to support better sharing of CPUs among virtual machines and boosts its overall support for virtual CPUs to 16, with 128 Gbytes of virtual memory.

However, that's still less than half what VMware and Red Hat can support. Perhaps the company can challenge VMware with its continuing collaboration with Microsoft to support management of each other's virtual environments?The latest version of XenServer will be manageable from Microsoft's upcoming Systems Center Virtual Machine Manager, while Citrix' XenCenter already supports managing Microsoft hypervisors and virtual machines. Red Hat, on the other hand, faces an uphill battle against VMware; Gartner predicts that Red Hat’s share of the market will only be 2% for 2012.

Nevertheless, the company has aggressively been working to make its virtual environment more manageable and robust. This process is helped by the acquisition of Qumranet, which gave Red Hat kernel-based technology to run on its Linux platform. That makes Red Hat a clear option for Linux shops.

There is other hope for Red Hat, as well. The company is likely to get a boost for its KVM efforts from IBM, HP and Intel, all of which are members of the Open Virtualization Alliance, which is dedicated to encouraging use of open virtualization technology. The established customer bases of these other vendors can only help the spread of Red Hat's virtual environment.

While the future remains uncertain for who will garner the biggest piece of the virtualization pie, definite competition and perceived value will most likely rule the roost in the ever-changing landscape of virtualization. IT managers will have to carefully consider multiple factors before pitching their tent in a single vendor’s camp.

This is the second of a three-part series examining the virtualization market. The first article looked at the virtualization licensing minefield, while the third article will explore network virtualization.

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