As vSphere revenues dip, VMware heads for the (hybrid) cloud

With revenues from the product that put it atop of the virtualization heap under siege, VMware looks to its new offerings to propel it forward – the hybrid cloud.

Is VMware about to jump from the frying pan and into the fire?

VMware expects vSphere revenues, its long-time flagship virtualization product, to trend down for the rest of 2016, and  pressure is building for the company to succeed in other voraciously competitive markets.

One of those markets in which the company hopes to plant a firm foothold is the hybrid cloud. Several heavyweights, including IBM, Dell, Hewlett-Packard Enterprise (HPE), along with hyper-converged infrastructure rivals Nutanix and Simplivity, already have heavily invested in that market as their best chance for growth, and VMware may struggle to establish enough elbow room to claim its fair share.

"There are more than a handful of companies in the same position as VMware, all of whom are managing the decline of legacy businesses," said Andrew Smith, an analyst with Technology Business Review, Inc. (TBR), market researchers in Hampton, NH. "In VMware's case they need to succeed here because vSphere as an on-premises solution isn't returning to growth."

During VMware's recent earnings call, Zane Rowe, VMware's CFO, said vSphere's license bookings were 35% of total license bookings in this year's first quarter, and that the company foresees for "at least this year a constant and predictable decline."

Some users with a meaningful investment in vSphere aren't pushing the panic button over the company's dour forecast for the product. Given's vSphere's commanding market share, they are confident the company will continue to enhance and maintain the product well into the future.

"There are hundreds of shops like ours, I am sure, that have longer-term licensing deals in place [for vSphere]," said one long-time IT professional with a large manufacturing company in St. Paul, Minn. "They won't walk away from this where there is still a lot of money to be made with [the existing] customer base."

Despite the increase competition, a concerted move toward the hybrid cloud is a smart one for VMware, Smith said, because its customers could use help to reduce the complexity of  moving to the cloud. That's the good news. The bad, according to Smith, is it "unfortunately opens VMware customers up to a wide range of options that may not be vCloud branded."

For vendors with hyper-converged offerings and who want to play in the hybrid cloud space […] It can be a way they get their foot in the door.
Andrew Smith, analyst, Technology Business Review

One technology that could increase VMware's chances for success in the hybrid cloud market would be a stronger entry in the hyper-converged infrastructure space. VMware has had little success with the lower-end EVO:RAIL, which was recently replaced by VxRAIL, and EVO:RACK (since renamed EVO:SDDC) still has not come to market after some 19 months.

But with rosy forecasts for hyper-converged over the next three to five years coming from a number of market researchers, it may behoove both vendors and users to figure out what sort of bridge between hyper-converged products and hybrid clouds makes the most sense for them. TBR's Smith believes hyper-converged offerings can be a valuable asset in piecing together a more compelling hybrid cloud strategy for companies including VMware, IBM and HPE.

"There are logical links for vendors with hyper-converged offerings and who want to play in the hybrid cloud space," he said. "It's not like vendors must build a public cloud with a bunch of services -- they can use hyper-converged as another avenue to get into that space. It can be a way they get their foot in the door."

In a report released earlier this month TBR projected a compound annual growth rate (CAGR) of hyper-converged platforms of 50% from 2015 to 2020, topping off at $1.6 billion. IDC estimates the overall hyper-converged market will grow at a  near-60% CAGR through 2019,  largely at the expense of traditional standalone servers, which generally are expected to grow in the low single-digits.

The TBR report attributed the growth to corporate users seeking more effective alternatives to traditional servers that can better accommodate modern workloads.

"Users' early experiences with niche workloads on hyper-converged [platforms] have been largely positive," said Christian Perry, practice manager and principal analyst with TBR. "There have been hiccups here and there among users we talk to, but the [system] management is seamless and they don't have to put as many resources toward the overall deployment."

Some also believe a hyper-converged stack could provide vSphere itself with another reason for being, indicating the product gives users a more granular control over the various layers of a hyper-converged stack.

"With things like [VMware's] VxRail coming which ties into VSAN, we can use tools in vSphere to get finer control over features in the stack," said a solutions architect with a large Houston-based service provider that deals with large corporate accounts.  "This beats saying, 'I'm just going to purchase a hybrid cloud service from someone else.'"

Ed Scannell is a senior executive editor with TechTarget. Contact him at [email protected].

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