VMware Shakes Off Worries

SAN FRANCISCO - Despite a turbulent month on Wall Street for VMware ( - - ), analysts recently dispelled doubts about the company's grip on the virtualization market.

They say VMware, which has a commanding 90% share of the virtualization market, will maintain its edge for specialized software that allows servers to run multiple operating systems because its management software tools are superior to those of their competitors, including Microsoft.

Market share will be determined by the sophistication of virtualization management tools. VMware has a clear start in these tools, said Michael Cherry, an analyst with Directions on Microsoft. He spoke last week at a Citigroup-sponsored analysts session on Microsoft.

Cherry said Microsoft ( - - - ), which recognizes the benefits of virtualization as a means for building big data centers, is going to be behind VMware in the development of these tools for some time to come.

VMware ended a volatile week Friday at $90.85, up 17% for the week, and regained some of the 42% it had lost during a month of whiplash valuations for the debutante stock. Overall, VMware as of Monday has fallen 24% since Nov. 1, compared with a drop of 5.2% for the Nasdaq during the same period.

News last month that business software developer Oracle ( - - - ) was started VMware's decline from a high of $125.25 recorded on Oct. 31, while the general outlook for the tech sector grew dim on economic fears, dragging the stock down further. The Nasdaq Technology Index has lost 8.3% since Nov. 1

"We're mindful of the competition ... but we believe that in simple head-to-head competition" VMware has the technology advantage, said VMware CFO Mark Peek at the conference.

VMware's management tools are the key to that advantage. Cherry said those VMware tools allow IT staff to instantly move software programs from one server to another and to back up and patch software more easily. In addition, VMware's latest tool lets managers move open software programs to different servers without disrupting their use.

VMware also has taken a page from Microsoft's playbook by partnering with server vendors who will sell its hypervisor software early next year on servers without operating systems, just as Microsoft once got vendors to install Windows before shipping PCs, according to Citigroup analyst Brent Thill.

This new capability "will help to solidify VMware's penetration within larger enterprise customers prior to, and during, Microsoft's attempts to infiltrate the same market," Thill wrote Wednesday.

While VMware's virtualization management tools are maturing, Microsoft isn't yet in the game, although it already offers some limited virtualization functions. "I think they've got a lot of catch-up to do to be on the level of an organization that specializes in virtualization, like VMware," Cherry said.

To gauge the distinctions between the two companies' technology, consider that Microsoft will add only the most basic virtualization software -- the hypervisor -- as a free feature of its Server 2008. By contrast, VMware currently earns 20% of its revenue from hypervisor sales and gets the bulk of its top line from management tools and maintenance revenue

VMware also must contend with open source virtualization software from Citrix ( - - - ) and Oracle. Citrix relies on XenSource software while Microsoft is developing its own proprietary software.

Peek says VMware has an advantage over its competitors because its hypervisor is not part of an operating system. He said IT managers like the hypervisor's flexibility because it allows virtualization to operate on many different operating platforms.

"We believe that Microsoft's coupling of the hypervisor and operating system may actually prove to be a detriment in many use cases," wrote Thill.

Cherry questioned Microsoft's decision to release Server 2008 early without completing the release version of the virtualization software. This may lead businesses to delay upgrading to the Vista operating system on desktops before installing the fully virtualized server software, he said.

Cherry characterized Microsoft's virtualization strategy as bent on ensuring the dominance of Windows. Data centers run multiple operating systems, and Microsoft plans to use virtualization in Windows servers to isolate and ultimately replace other operating systems running on virtualized servers, he said.

Gaining dominance in the virtualization market depends on management tools to run the data center, and Microsoft may find it difficult to achieve that because its traditional strengths have been operating systems and application software.

Microsoft tools "tend to be Microsoft-centric," Cherry said. "They're not as good in a mixed mode environment. Microsoft is trailing VMware in this management of the virtualization space."