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Is the sky falling on VMware?

New competition from Microsoft, criticism from Wall Street and an unflattering Novell comparison raise questions about VMware's future virtualization dominance.

VMware is at a crucial point in its 11-year history.

The virtualization leader now faces its most serious challenge yet -- from Microsoft's much-improved Hyper-V R2 hypervisor.

For more on VMware vs. Hyper-V:
With Live Migration, Microsoft Hyper-V inches closer to VMware ESX

Hyper-V R2 matches VMware with 64-processor support

Hyper-V vs. VMware: Which is cheaper?
Some on Wall Street say the company's stock is overvalued. And a leading IT analyst thinks VMware could be headed for a Novell-like downfall.

It's enough to make the IT world -- even VMware Inc.'s proponents -- wonder whether the company is losing its allure as the go-to virtualization vendor.

"The sky's not falling, but it's drizzling," said Brad Maltz, the chief technology officer of International Computerware Inc., a VMware partner in Marlborough, Mass. "The Microsoft message is getting stronger. It's not something [VMware] can't handle, but it's something they have to keep their eye on."

VMware draws Novell comparison
This competition from Microsoft, which just released Hyper-V R2 to manufacturing last month, is the point of origin for all other questions about Microsoft. .

When financial analysts told Reuters that VMware's stock price was poised to go down, it was because the company had "yet to factor in the competitive threat" from Microsoft (and potentially Oracle as well).

Clients we're talking to ... are taking a wait-and-see attitude with Microsoft's Hyper-V R2.
David Cappuccio
Research vice presidentGartner Research
And when Gartner Research Inc. Vice President David Cappuccio wrote that VMware could lose its leadership role in the virtualization market, he compared the company to Novell Inc. -- the former software giant that Microsoft took down handilyin the 1990s.

And that brings us to VMware's standing today. Long seen as the dominant player in virtualization, VMware leads in features, management tools and market share, but Hyper-V R2 offers expanded management tools and other new capabilities that could change all that.

"Clients we're talking to aren't running away [from VMware] right now, but a lot of them are taking a wait-and-see attitude with Microsoft's Hyper-V R2," Cappuccio said in an interview.

That's got to make VMware take a very close look at history, he said. Back in 1995, Microsoft was a non-player in the Novell-dominated LAN software market. Even when Microsoft came out with a free Windows 95 networking application, Novell didn't worry, because it wasn't enterprise-ready.

But what Novell didn't count on was that technology geeks inside corporate IT departments "fooled around with [Windows 95], and over a few years it became pervasive," Cappuccio said. "The danger for VMware is that is exactly what will happen for enterprise virtualization."

Is Microsoft Hyper-V R2 'good enough'?
If Hyper-V R2 proves to be a good enough virtualization alternative for what corporate IT departments need, that's when VMware will need to start worrying, Cappuccio said.

Dave Sobel, CEO of Evolve Technologies, a Microsoft partner and managed services provider in Fairfax, Va., agreed.

'Good enough' always wins out in the long run.
David Cappuccio
Research vice presidentGartner Research
"Microsoft is clearly gunning for the virtualization space, and they have a pretty good track record of making a dent in a space that they want to be in," he said.

Another real problem for VMware is that Hyper-V R2's management tools now manage VMware's ESX hypervisor, while VMware's tools won't manage Hyper-V R2. That's big for users who want to use both hypervisors, because only Hyper-V R2 will be able to manage the entire environment, Cappuccio said.

"I would hope [VMware is] paying attention," he added. "My fear is that 'good enough' always wins out in the long run, and if it's good enough and pervasive, VMware may lose out."

What has to worry VMware even more is that improvements in hardware mean that companies can add new servers with additional processors and cores and still use them under their existing licensing agreements. That's great for users, but it hurts VMware's sales of new licenses, said Chris Wolf, an analyst with the Midvale, Utah-based Burton Group.

VMware vs. Microsoft in the future
One factor in VMware's favor is its long head start in the market, Wolf said. For VMware's existing customers, the new features in Hyper-V R2 -- including hot-add and remove storage capabilities and Live Migration -- won't be enough to lure them to Microsoft, he said.

Microsoft and Citrix both … are going to get a reasonable part of the market.
Chris Wolf
AnalystBurton Group
"Our clients who have done large-scale deployments don't see Hyper-V R2 as having enough features for them to move," he added. "However, some are saying they'll look at one more release cycle [for Hyper-V] and then do another assessment."

VMware most stands to lose with companies that are not yet using any virtualization and are shopping for the right vendor, Wolf said. Those customers will likely look at VMware, Microsoft and Citrix Systems Inc.'s XenServer to decide on the right choices.

"Microsoft and Citrix both, I think, are going to get a reasonable part of the market," Wolf said.

Hyper-V R2 will likely add new users in the small and medium-sized business sector, because of the new features and an ingrained familiarity with Microsoft products and support, Wolf said.

Still, "virtualization is going to remain a multibillion-dollar business, and VMware is going to remain the market leader for the next few years," he added. "VMware and its position, especially in the data center, remain unchallenged. It's going to take some time for competitors to chip away."

Sobel said VMware isn't necessarily on the ropes now, but there are new opportunities for Microsoft.

"Microsoft's hypervisor is now equivalent in all the key areas," he said. "The Live Migration stuff takes away the VMware advantage. That has always been held up as the feature that VMware had that made them the leader." And Hyper-V's constant improvements will continue to put pressure on VMware, said Rick Vanover, a corporate system administrator and independent virtualization expert.

"VMware is the leader," he said. "[VMware has] to look over its shoulder, and nobody else has that burden."

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