How Can VMware Grow in a Saturated Market?
Virtual computing has been a hot trend for a long time. The market might even be close to saturation because it's been going like hotcakes for so long. According to Raghu Raghuram, senior VP of cloud infrastructure at VMware (NYS: VMW) , about 50% of server workloads ran on virtual machines by the end of 2011. You can't do much more than doubling a market penetration like that, right? The growth story must be over.
But VMware still sees plenty of growth left to explore, and the secret sauce is called cloud computing.
So what's the magic?
In this week's earnings call, management laid a heavy load on the shoulders of cloud computing. Virtual computing simplifies the management of your data center, squeezes more work out of the same hardware, and lets you run a more flexible IT operation with fewer machines and lower staffing levels. That's the part that's already generally accepted as best practices in enterprises everywhere.
The next step in the transformation VMware wants to market starts from this platform. And then you use it to do things the old systems never could handle. The new ideal is to run private, secure cloud services on a fully virtualized infrastructure.
Best-case scenario, the software teams don't have to care about the hardware. They just write, run, and support applications on a malleable mesh of servers, storage, and networks. Users consume these programs over private networks, often delivered in secure tunnels over the open Internet. There might be specialized client programs or mobile apps involved, but Web browsers are a very typical user interface. Everything is automated, easily changed, and exactly as public or private as you need it to be.
Delivering this whole package is at the core of VMware's strategy today. "We think that customers view infrastructure as incredibly important, but it's not the thing that they want to spend more of their time and money on," says CEO Paul Maritz. "Instead, they would rather be able to redirect their focus toward things that really are going to differentiate them in the marketplace versus their competition. When that happens, customers tend to place a greater premium on getting a complete suite of functionality, and that's what we're doing for virtualized infrastructure and for private clouds."
Mainframe concepts for smaller systems
If that operating model sounds familiar, even old-school, you're probably used to working with big-iron IBM (NYS: IBM) mainframes or Hewlett-Packard (NYS: HPQ) Superdome systems. Using those platforms, the machine can be sliced and diced any way you want it and upgraded on the fly, and it's managed by a sophisticated set of mainly automated tools. This is upper-crust server technology.
And you'd be right. But this time, the underlying hardware isn't one perfect system. It can be a mishmash of smaller machines, running various operating systems on widely varied hardware. But VMware makes it look and feel like one easy-to-manage mainframe. You don't need a million-dollar mainframe to work like this anymore.
Doing this takes a lot of add-ons to the virtual server structure that's so widespread today. That's why management sees such a rosy growth future, even after every system is managed as a virtual server. And on top of that, these systems can perform workloads that plain old hardware or even a simple virtual server never could. So there's another growth angle -- expanding the total market for server-class computing.
Doesn't everyone else have the same idea?
This isn't the only company working on a similar model, of course. The Microsoft (NAS: MSFT) System Center suite aims to organize all your physical and virtual IT assets under one umbrella. Big Blue's WebSphere platform is expanding in that direction as well. The cluster of cloud products from Amazon.com (NAS: AMZN) , known as Amazon Web Services, arguably fills the same functions, albeit from a slightly different angle. In this case, you don't even own the hardware, nor necessarily know anything about it -- Amazon just makes sure it's available to you in a virtual package. Some pretty big names in consumer technology are running their IT almost entirely on this platform.
Different strokes for different folks. According to the analysts at Gartner, VMware still dominates the server virtualization market it invented, with a crushing 65% market share. Microsoft runs a distant second at 27%, and nobody else comes close despite their best efforts.
Overall, VMware grows sales at a 30% run rate. Trailing earnings more than doubled over the past year. This strategy is clearly working. Learn all about the cloud-computing revolution in this special video report. It's free to Fools, but only for a limited time, so why don't you watch it right now?
At the time this article was published Fool contributorAnders Bylundholds no position in any of the companies mentioned. The Motley Fool owns shares of Amazon.com, IBM, and Microsoft.Motley Fool newsletter serviceshave recommended buying shares of Microsoft, Amazon.com, and VMware, as well as creating a bull call spread position in Microsoft. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check outAnders' holdings and bio, or follow him onTwitterandGoogle+. We have adisclosure policy.
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