VMware Feels the Heat from Microsoft

SAN FRANCISCO - VMware(VMW Quote) got hammered again Friday by Microsoft's(MSFT Quote) early release Thursday of its virtualization product.

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.