Microsft vs. VMWare for the Virtualization Crown

Implications: Microsoft has long been considered the most credible threat to VMWare’s continued reign in the virtualization space. Microsoft has been very late to this game and has a challenge of overcoming VMWare’s lead, while VMWare should rightly fear Microsoft’s size and power. With the beta release of their hypervisor Microsoft has fired the first salvo in what promises to be an ongoing war.

Analysis: Virtualization is rightly considered the leading area for growth and innovation in the IT infrastructure market. VMWare has dominated this market, and in fact basically created it. The original virtualization products were mainframe operating systems from IBM, but VMWare was the first to prove this technology could be commercially viable with commodity hardware and operating systems. VMWare has capitalized on this with a remarkably successful IPO.

Other companies are several years behind VMWare, but are expected to present some level of competition during the next couple of years. Citrix’ recent $500M purchase of XenSource is a visible indication of the importance of this sector. Both Red Hat and Novell have baked virtualization into their respective Linux releases. Virtual Iron is a small company that is attempting to provide a range of products comparable to those offered by VMWare, but at significantly reduced prices. However, the biggest threat looming over VMWare has long been Microsoft’s imminent release of virtualization.

The virtualization market actually encompasses a range of product offerings. The most basic element of virtualization is a hypervisor, which is essentially a very stripped-down, minimal operating system core. Since hypervisors are available today at minimal cost from a number of sources, they probably don’t represent significant revenue opportunities themselves. Probably the greatest significance to the hypervisor is that it represents the proverbial “camel’s nose under the tent flap” in virtualization. Once the camel’s nose is in the tent, the rest of the camel is likely to follow soon, so every virtualization company wants to be represented with “their” hypervisor.

VMWare has achieved a significant lead in hypervisor technology. Their latest ESX 3i hypervisor is very small, which greatly reduces the security risks and allows it to be loaded ubiquitously. A mounting concern among enterprises is whether or not a given hypervisor will be subject to the same security issues as Windows and other OSes. The smaller the hypervisor, the less chance that vulnerabilities exist, so smaller is definitely better. The other advantage of small is that the hypervisor can be loaded into flash memory, either as a portable memory stick or physically mounted on the server motherboard. In fact, a number of major server manufacturers have already committed to providing the VMWare hypervisor as an option in flash on the motherboard of their servers. This gives VMWare a serious advantage in this competition, albeit little or no direct revenue.

The bulk of VMWare’s revenue comes from additional products built on top of the basic hypervisor. Using some or many of these products is where the big advantages are attainable by enterprises, and similarly where the big revenue opportunities are available for vendors. It seems likely that VMWare’s revenue from their core virtualization products will not be significant in the years to come, but any losses there should be more than compensated for by gains in the rest of their product line. Naturally, as the market matures over time the competition will intensify, but even Microsoft is going to have an uphill battle to unseat VMWare as the leader.