Virtualization Market Reshapes

VMware's IPO, Citrix-XenSource deal represent a change in an expanding space.

It was only nine years ago that Diane Greene and her husband helped found VMware, a startup with the idea of taking the concept of hardware virtualization that was commonplace in high-end servers and mainframes and bringing it to the rapidly expanding x86 marketplace.

Fast-forward to 2007, and VMware is the leader in one of the fastest-growing segments of the technology industry, with rivals large and small looking to knock off the king. Recently, the Palo Alto, Calif., company was in the middle of a wild week that saw the virtualization space rapidly reshape itself.

On Aug. 14, VMware, owned by storage giant EMC since 2004, launched its much-anticipated IPO (initial public offering) and saw shares on the first day almost double in price, with officials hoping to raise more than $900 million in capital.

A day later, Citrix Systems announced plans to buy open-source virtualization vendor XenSource for $500 million, a move that could have further ramifications given both companies close ties to Microsoft, which is developing its own virtualization hypervisor, dubbed Viridian.

In addition, some analysts, such as Brenon Daly at The 451 Group, said the Citrix-XenSource deal could be a prelude to Microsofts buying Citrix.

"Citrix built a $1 billion-plus business on the back of its access to Microsoft source code," Daly said. "XenSources exclusive access to Microsofts forthcoming Viridian hypervisor code is a key driver for this deal. For Citrix, Viridian becomes the base operating system component for its next business, just as Windows Terminal Server has been for Presentation Server."

Either way, the moves were an indication that the virtualization market will continue to see competitive forces come into play and raise the level of awareness of the technology among enterprises, particularly given the potential for growth during the next few years. Research company IDC expects that by 2009, businesses will be spending upward of $15 billion on virtualization technology.

"Todays acquisition of XenSource by Citrix and VMwares recent IPO are strong indicators of the dynamic nature of the virtualization market," said Larry Orecklin, general manager of System Center and Virtualization for Microsoft, in Redmond, Wash. "With less than 5 percent of servers across the globe currently virtualized, the market is still emerging and full of innovation and opportunity for customers."


Read more here about VMwares IPO.

Virtualization is the ability to run multiple instances of operating systems and applications on a single physical server. Initially pitched as a way to address historically low utilization rates among x86 servers and to consolidate systems within data centers, its now being eyed as a tool to help in backup and disaster and recovery projects. And where virtualization once was primarily a software product, chip makers Advanced Micro Devices and Intel are both offering virtualization capabilities within their processors.

In recent years, a crop of new companies, such as Virtual Iron and SWsoft, have challenged VMwares dominance. Microsoft also looms as a major player, and now the Citrix-XenSource combination promises even more competition.

Citrix customers applauded their vendors move, though not all were ready to move to a virtualization environment based on XenSource.

"We prefer more freeware and open source," said Christopher Boone, CEO of AppCentral Technologies, in San Francisco. "We had considered XenSource in the past, but we have a partnership with Microsoft and use their [free virtualization technology]…I think we will see a lot of consolidation in this space. EMCs acquisition of VMware and now the IPO and its performance [are] indicative of the markets appetite for this kind of technology."

However, Citrix Presentation Server customers such as BlueCross BlueShield of Tennessee may make a move.

"We havent been very successful with deployments of Presentation Server and VMware," said Mike Prewitt, team leader on the server team in the Windows & Network Infrastructure Group at BlueCross BlueShield, in Chattanooga. "They havent given us the numbers we can get for what it costs [to buy] blade servers with multicore [processors]. As they tune a product [with which] we could start seeing better return, it would be interesting."

Users such as Prewitt are going to have a wider array of choices in virtualization as more companies enter the fray. But VMware isnt ready to concede anything to its rivals. Greene, VMware president, said her comp-anys IPO will help it keep its name front and center. "We think its a wonderful awareness-raising event for us," Greene told eWeek a few hours after the companys stock went public. "We pride ourselves on our software. Our customers love it so much, but letting customers know about it is one of our biggest challenges, so Im very excited about what today might have facilitated here."

Gartner analyst Tom Bitt-man said VMware would be wise to invest some of the money gained through the IPO in a new consulting force in addition to looking for some key acquisitions to help bolster its business. While the IPO has been a boon for VMware, the company is facing increasingly stiff competition from other vendors that have been using the Xen hypervisor to position themselves as low-cost alternatives to VMware.

That said, the biggest challenge will come from Microsoft Windows Server 2008 and the Viridian hypervisor, which could debut as a beta by years end.

"Basically, for the last five to six years, VMware has had no competition," Bittman said. "The first real competition came when you had vendors developing Xen open-source products, and then you are going to have Microsofts Viridian in beta later this year. I think Microsofts product is going to be a serious competitor to VMware, and Microsoft has also really improved its management technology."

Wes Wasson, chief strategy officer with Citrix, said the XenSource acquisition puts his company on that list of VMware competitors.

Citrix, of Fort Lauderdale, Fla., had been looking at a number of ways to expand its virtualization reach, both at the desktop level and within the data center, for almost a year, Wasson said.

With the XenSource acquisition, Wasson said, Citrix not only strengthens its hand when it comes to desktop virtualization and delivering applications to the client but also is able to move deeper into the data center to deliver those types of services to customers.

"We want to be able to deliver any application to any users over any network," Wasson said, adding that the relationship both Citrix and XenSource have with Microsoft, as well as IBM and Hewlett-Packard, gives the partnership an advantage in a marketplace dominated by x86 servers running Windows.

Senior Editor Paula Musich contributed to this report.


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