VMware's Competitors Narrow the Gap

SAN FRANCISCO - VMware(VMW) must walk a fine line between revenue growth and price cuts to remain the market leader in virtualization.

A report released Wednesday shows the company's market share is eroding quickly as competitors close the technology gap with lower-priced products. But the report's author says new leadership at VMware may help stem the trend.

The stock was recently up $2.18, or 6.2%, to $37.41, surpassing its one-year price target of $36, according to Thomson Reuters. The stock has enjoyed a two-day gain of 12% since closing at $33.33 Tuesday.

Virtualization software helps corporate data centers drastically cut hardware, energy and cooling costs by making more efficient use of servers and desktops.

Yankee Group analyst Laura DiDio estimates the entire virtualization market will take in about $12 billion to $14 billion in 2009, growing at a 25% to 30% compounded annual rate over the next three years. In 2011, the worldwide market will be worth about $20 billion in revenue, she says.

VMware has 75% of the market, but lowered its growth forecast at its most recent earnings call, in part due to Microsoft's(MSFT) early release of its virtualization hypervisor technology in late June. The Hyper-V is loaded onto Windows Server 2008 -- a move that is expected to make deal closure more difficult for VMware.

Oracle(ORCL), IBM(IBM), Hewlett-Packard(HPQ), Sun Microsystems(JAVA), Virtual Iron and niche player Parallels are all chipping away at VMware's dominance, according to DiDio.

"Oracle in particular is poised for explosive growth in the application virtualization and virtual appliances segments given its recent acquisition of middleware vendor BEA Systems," DiDio wrote.