Citrix Closing in on VMWare

Implications: VMWare has long dominated the virtualization market, but with Citrix’ purchase of XenSource it has the tools and the motivation to take a portion of that market.  VMWare has excellent products, but is vulnerable on pricing.  Citrix will be a strong competitor and will be putting pressure on VMWare.

Analysis: VMWare has been essentially alone in the server virtualization market.  Microsoft continues to lurk in the shadows with their Viridian product, but that’s not due out until late in 2008, so it’s not yet a competitor.  Virtual Iron has products competitive with VMWare but lacks the resources and credibility to be a serious threat.  Citrix’ recent purchase of XenSource gives them the potential to be a strong competitor to VMWare, but only time will tell how much impact they actually have on the market.

VMWare, by any analysis, has an excellent array of products for server virtualization.  The market has embraced the company and products, as evidenced by their rapidly growing revenues and profits, which have driven their market cap to stratospheric levels.  These revenues and profits are supported by relatively high prices for their most desirable tools, such as VMWare Infrastructure, but that same pricing structure is also limiting their penetration into the market.  A thorough ROI analysis is required today to justify implementing VMWare Infrastructure, given the amount of cost it adds to the basic cost of the hardware infrastructure.  This has led to many cases where CIOs would like to move further into virtualization, but cannot justify the cost. 

This pent-up demand for a lower-cost alternative to VMWare is an opportunity for Citrix.  Virtual Iron does not have the enterprise credibility needed to gain widespread acceptance.  They can be expected to show healthy growth, but cannot be considered a serious threat to VMWare.  Citrix, on the other hand, already has a proven track record in enterprises and does not need to establish credibility.  Most CIOs are already running some Citrix products and will be relatively comfortable expanding that relationship into virtualization.

Citrix and VMWare have taken a fundamentally different direction in implementing storage systems.  VMWare uses its own proprietary file system, whereas Citrix utilizes the existing file systems on the storage (Network Appliance primarily today).  This is an advantage for VMWare initially, since they can offer a complete solution that runs on any storage.   In the longer term, however, this is likely going to be an advantage to Citrix if they are able to get full support in place for all the major storage systems.  Using vendors’ native file systems simplifies the virtualization software, improves compatibility and likely improves performance.  This could be a significant advantage for Citrix, if and when they get it fully baked.

Citrix’ challenge is to produce a competitive product suite.  The 4.1 beta is a big step in that direction, but they still have a distance to go.  The fact they are releasing the 4.1 version only a few months after the XenSource acquisition is an encouraging sign.  If they can continue to release new versions for the next 12-18 months, while maintaining a cost advantage, they will likely close the gap sufficiently to gain significant market share.  VMWare’s pricing makes them vulnerable to a competitive Citrix product.  VMWare continues to add bells and whistles to their products, but at some point everyone’s products become “good enough” and additional features will be used by smaller and smaller groups of customers.  At that point VMWare will no longer be able to win in terms of features, but will have to compete on pricing and enterprise credibility.  Both Microsoft (eventually!) and Citrix have the advantage in that arena. 

The good news for VMWare is the entry of Citrix and Microsoft into the market is likely to increase the size of the market dramatically, so VMWare can likely continue healthy growth.  They are, however, going to see serious margin pressure.