Microsoft’s Virtual Strategy Becomes Visible

Implications: Microsoft may never be able to catch up with VMWare’s lead in technology, but if they can produce the “Office” of virtualization they may not have to win the technology war to win the business war.  Providing an all-encompassing suite of virtualization tools at low prices will make a compelling story.

Analysis:

VMWare is justly proud of the innovative technology they have developed for virtualization tools.  They have been able to stay ahead of their competitors due to their “first-mover” status combined with continuing technology development.  This has allowed them to charge premium prices for their products.  This lead in technology and the market, combined with their margins, has contributed to their lofty market cap.

Competitors have been nibbling at VMWare for some time, but with limited success.  Red Hat and Novell’s SuSE Linux both incorporate virtualization tools and are available as no-charge open source.  Virtual Iron provides a product suite somewhat similar to VMWare’s, but at a greatly reduced price.  Citrix’ recent purchase of XenSource potentially creates a serious threat sometime in the next couple of years.  Microsoft is the big threat, but they have been very late to this party.  Despite several small acquisitions they have not yet released a competitive product.  Their “Viridian” product is due to ship later in 2008 (perhaps much later).  The scheduling of the Viridian product has given VMWare time to solidify their position at the top of the virtualization market. 

Microsoft’s acquisition of Calista shows they are interested in the desktop virtualization market as well as the server virtualization market.  At the same time their announcement of a reduction in the licensing cost for virtualized Vista is a big step forward in supporting “their” operating system in a virtualized mode, which also will encourage more people to run “their” virtualization tools.

Bob Muglia’s comments show that Microsoft’s strategy is to create an Office-like product in the virtualization space.  Not content to compete in the server or desktop space alone, they seem to be planning to release an integrated product that incorporates both.  Such high levels of integration will not be available any time in the next year or so, as Microsoft struggles just to release individual server and desktop products that are competitive.  However, if Microsoft is able to achieve a level of integration comparable to that in Office, it will be a compelling product.

VMWare is today the acknowledged leader in virtualization technology and their products are generally priced to reflect that leadership position.  Many enterprises that otherwise would have already embraced virtualization are still on the sidelines due to VMWare’s high prices.  VMWare’s competitors are not generally considered within enterprises as being fully mature, so they also are not generally accepted.  This deadlock has effectively slowed the adoption of virtualization within enterprises, and ironically is providing time for Microsoft to catch up on technology.

A Microsoft virtualization product that encompassed the entire server/PC environment would be a compelling story in and of itself.  Combine that with pricing at perhaps 40-50% of what VMWare is charging, add in the Microsoft name, credibility and selling ability, and suddenly Microsoft might be able to dominate this industry as well.  At worst they will be competitive and VMWare will be under margin pressure to maintain a significant market share.