Weekly Update

The week VMware woke up

VMware plans to spin out its platform as a service business, CloudFoundry and assets from the EMC Greenplum acquisition, to create a big data analytics cloud company, according to reports by GigaOM. Meanwhile, VMware CEO, Paul Maritz, is out on his ear, to be replaced by Pat Gelsinger, COO of EMC. Maritz is being moved sideways into a chief strategy role at EMC.  But don’t panic. The reported spin out and reshuffle makes some sense.

VMware has enjoyed a 70% market share lead in virtualization for almost a decade but has taken its eye off the ball, according to industry watchers. Sitting atop piles of cash, the company went on a buying spree for the past few years, beginning with Java development platform, SpringSource in 2009 and most recently it snapped up big data analytics firm, Cetas. In between, it’s acquired SaaS companies Zimbra, SlideRocket, Mozy, SocialCast and a shopping list of other odds and ends, in an effort to pivot from virtualization into cloud computing.

In the meantime, Microsoft has been eating into VMware’s core business with Hyper-V and the virtualization leader is feeling the heat. It  just acquired DynamicOps to manage multi-hypervisor environments after years of insisting it wouldn’t go there. And boy is it late. An entire eco-system of startups has been funded and have built solid businesses in the multi-hypervisor, multi-cloud management space, including RightScale, Enstratus, ScaleXtreme and others. With much of the innovation in cloud happening at startups, VMware has seen a brain drain of top talent to these newer companies.

At the center of it all VMware faces a business model transition, much like its parent company, EMC. It is a traditional enterprise IT supplier – it sells a license to its software and collects cash up front. Meanwhile, nobody wants to buy software like that anymore, if they can help it. Users are buying SaaS apps in a pay-as-you-go or subscription model, in their droves. But VMware’s stock is still valued as a multiple of the cash it brings in, not by accounting for profits from a subscription business. Analyst George Gilbert, notes that this makes selling online (cloud) services and open source products really difficult when they are under the same roof as the traditional business.

For example, CloudFoundry and vFabric (from SpringSource) are subscription-based services, as are all the SaaS companies VMware has acquired. Their prices likely reflect a far more competitive environment than VMware is used to selling with the vSphere and the vCenter management tool suite. Now imagine trying to get a sales organization to sell services that bring in 10% or less up front compared to its traditional, on premise software.

Furthermore, the development and release cycle of online services versus traditional enterprise software is entirely different. Online services are continually being updated and improved while enterprise software goes through big upgrade cycles every 18 months or so. Combining the two, or “walking while chewing gum” as Gilbert describes it, hasn’t worked out for VMware.

If the reports this week are correct and VMware spins out its online assets, or at least some of them, these businesses stand a better chance of success unencumbered by VMware’s legacy software license business. In addition, Gilbert notes that combining the analytic Greenplum database with VMware’s memory-resident, transactional database SQLfire would break down the traditional walls between transaction and analytic databases. Building those two products into a cloud offering in the form a “database as a service” would be very attractive, he adds, relative to Amazon’s Dynamo DB, Heroku’s Postgres and big data analytics services like Google’s BigQuery.

VMware reports its second-quarter earnings on July 23 and is also ramping up for VMworld next month, where it will no doubt shed more light  (and spin) on these plans.

 

Question of the week

Will VMware reshuffle help or hurt its efforts to dominate in cloud?