VMware raises the cloud-computing ante

Aaron Ricadela
02 Mar 2009

The tussle between VMware and Microsoft in the market for high-end computer software is about to kick into high gear.

On Feb. 24, VMware (VMW) released key pieces of an ambitious new product that's designed to help companies more efficiently juggle complex computing tasks. Dubbed the Virtual Data Center Operating System (VDC-OS), the software creates a bank of computers, storage devices, and networking equipment that a company can tap at will, as computing needs arise"”say, during a December spike in Web traffic for an online retailer.

The software, due later this year, reflects VMware's push into so-called cloud computing, which lets a business rely on an outside provider for storage, data processing, and other computing tasks. The idea is that a company can reduce expenses and save time by turning costly computing over to a better-equipped provider. By making the leap, VMware becomes the latest tech company, along with Microsoft (MSFT), Google (GOOG), and Amazon.com (AMZN), that wants to supply the tools for building the world's next generation of software.

Heated battle with Microsoft

The battle with Microsoft has been particularly bloody. Last year, amid signs of accelerating competition from Microsoft, VMware replaced then-CEO Diane Greene with Paul Maritz, Microsoft's No. 3 executive in the 1990s. In January, another former Microsoft lieutenant, Tod Nielsen, became VMware's chief operating officer. Both were veterans of Microsoft's bruising battles with Netscape and Sun Microsystems (JAVA) in the '90s, and the landmark antitrust trial that ensued. Together, the team is trying to help VMware avoid the kind of fate Microsoft once dealt to others.

VMware grew to $1.9 billion in sales by proffering virtualization software that helps companies slice costs by loading up computers with more work, cutting hardware and power costs. 'The growth here has been great,' says Nielsen. 'We won the Super Bowl. I want to win the Super Bowl every year.' Not if Microsoft can help it. Last year, Microsoft started giving away similar software with versions of its Windows Server operating system, cutting into VMware's sales.

Now, to increase its chances of staying relevant, VMware is assembling a network of hardware and software companies that can make their products work seamlessly with VMware's, realizing additional sales as customers buy the vendors' products together. VMware is also trying to expand its customer base by courting Web companies whose sites could run faster using its software.

Building an ecosystem

Building networks of developers, creating what's known in tech circles as an ecosystem, is a specialty of Nielsen's. He joined VMware after serving as CEO of programming tools company Borland Software (BORL), and headed developer relations at Microsoft in the '90s. VMware's sizable customer base"”it counts 130,000 companies that run its virtualization software"”could give it an edge in attracting developers. So could cooperation with powerful allies Intel (INTC) and Cisco Systems (CSCO), both of which are VMware investors and counting on its products to enhance their own. 'Ecosystems follow opportunity,' Nielsen says.

VMware needs just that as growth tapers off from the torrid pace that resulted in the most successful initial public offering of 2007. The company's revenue increased 42% last year vs. 88% in 2007 amid an IT budget clampdown and competition from Microsoft, which includes its product free with Windows.

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