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VMware Feels the Heat from Microsoft

Ivy Lessner

Microsoft's Hyper-V virtualization, which has been available in beta, was released to market Thursday for its Windows Server 2008. VMware promptly fell 5.2% and continued its descent Friday, dropping 8.7% to $53.80 before recovering to trade at $55.50, for a two-day drop of $6.68, or 10.7%.

Virtualization enables corporate IT departments to run multiple operating systems and computer programs on a single server, drastically cutting their hardware needs and reducing power consumption.

Virtualization management tools also enable IT managers to increase the availability of software applications and simplify data backup and recovery. In the future, managers will begin virtualizing desktop computers as well.

New competition is generally bad news for VMware, the virtualization leader that built a $2 billion-dollar business in the absence of full-fledged competition. Microsoft's Hyper-V hypervisor is expected to erode VMware's market dominance, although it takes a different technological approach. The Hyper-V is inside the Microsoft server operating system, as opposed to VMware's approach of putting the OS atop the hypervisor.

"We think Hyper-V adoption will be rapid over the next two years," because it has "proven to be very stable and reliable from the get-go," Avian Securities analyst Jeff Gaggin wrote in a note Friday. Hyper-V also performs out of the box most of the tasks accomplished by VMware's comparable product, he added. Avian does not make a market in shares of either VMware or Microsoft, and neither company is a client.

Microsoft's product, which is viewed as targeting the low end of the market initially, may also displace vendors already serving that segment, such as privately held Virtual Iron. Virtual Iron has marketed its products as a lower-cost alternative to VMware. Now, Microsoft is moving in on that territory.

While VMware has not reacted to Microsoft's early release of the Hyper-V, Virtual Iron has become VMware's strange bedfellow, going on the offensive against Microsoft's technology.

"Hyper-V doesn't have the mobility, high availability, recoverability and load balancing capabilities that actually make server virtualization valuable to customers," Virtual Iron Chief Strategy Officer Tony Asaro wrote on a blog post emailed to reporters this week.

High availability, recovery and load balancing are features of advanced virtualization-management tools also sold by VMware.

"VMware's management capabilities are world class in our view," but businesses are more likely to implement Microsoft's baked-in management tools than use third-party applications, such as VMware's, Gaggin stated.

"Today, MSFT Hyper-V has about 80% of the features that VMW has," Gaggin wrote. But Microsoft "should close the technology gap in future releases."

And Microsoft has worked closely with technology partner Citrix(CTXS) to ensure that its Hyper-V will be interoperable in virtualized data centers with Citrix's open-source XenSource virtualization, and vice versa.

Microsoft's technology-sharing pact with XenSource "will prove to be one of the best moves in MSFT's history," Gaggin added.

Microsoft shares were recently down 24 cents, or 0.9% to $27.51, for a two-day drop of 3%.

Windows Server General Manager Bill Hilf said the Hyper-V has been downloaded by one million users during the beta period, and 250 corporations tested it intensively in cooperation with Microsoft.

Users reported they do not want another separate technology in the data center, Hilf said in an interview. They also indicated they don't want to pay a lot of money for what they "think should be part of the server operating system."