Virtualization Rivals May Vex VMware

While short of offering all the bells and whistles that VMware offers, XenSource's latest product costs less than half of the closest VMware product.

A XenEnterprise license goes for $2,499 and costs $500 a month for technical support, the company's vice president of marketing, John Bara, told PC World. VMware's Virtual Infrastructure 3 costs $5,750 per license plus $1,200 a month for technical support, he said.

And about 70% of XenSource's customers formerly used VMware, Bara told Bernstein Research, meaning that a lower-end, lower-cost product has appeal to initial VMWare users.

The steep prices VMware charges are even more glaring when compared to start-up Virtual Iron, which counts top venture capital firms like Matrix Partners and Highland Capital as its backers. Virtual Iron can do about 85% of what VMware can do, says John Thibault, but charges just $1,000.

"VMware has great products, but when we talk to their customers, the No. 1 complaint is that they are just too expensive" says Thibault. "We do 'bake-offs' against them all the time, and more often than not, we win."

Thibault concedes that it would be difficult to persuade some big companies that have already spent a fortune setting up VMware's systems to convert. But VMware already counts all of the Fortune 100 and 84% of the Fortune 1,000 among its roster of clients.

That means a good part of the growth for VMware may be among smaller businesses -- exactly where companies like Virtual Iron and XenSource will make for stiff competition by offering low prices.

At the end of the day, VMware may be forced to lower prices to keep market share, or cede market share if it wants to continue to charge high rates. Either option, though, would put its already-astronomical valuation under pressure.