Microsoft Steps Up Virtualization Vision

The software giant heats up the competition with VMware.
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SAN FRANCISCO -- As server virtualization makes inroads and open-source software spreads like a virus, Microsoft (MSFT) - Get Report has not watched idly as threats to its Windows brand grow.

Both virtualization and open source reduce reliance on the monolithic Windows operating system. The Redmond, Wash., software company appeared to join its competition when it announced previously that virtualization will be a feature of its next server package, Windows Server 2008.

To bolster the competition with industry leader

VMware

(VMW) - Get Report

and to shore up its defenses against other entrants, Microsoft announced Tuesday that it is bundling a range of virtualization extensions to desktops and adding system management tools.

Microsoft also announced the acquisition of Calista Technologies, a San Jose, Calif., start-up with 35 employees whose software improves the response times and look of software on virtualized and remote desktops. Terms were not disclosed.

Calista's software-based approach to improving performance will bring faster adoption of the technology over hardware-based acceleration, said Microsoft's Shanen Boettcher, general manager of Windows Product Management.

"It's a difficult call whether they will be able to make inroads against VMware," said Allan Krans, analyst with Technology Business Research.

Microsoft would be happy to simply take share from VMware, Krans said. Microsoft prefers to make money on operating systems, "but if they can take share by adding

virtualization tools, it's still a net gain."

Later this year, Windows Server 2008 will come with HyperV, the fundamental layer of virtualization software, built in.

JPMorgan analyst Adam Holt projects that Microsoft's server and tools business will grow 17.2% in 2008, to $13.1 billion, compared with 15% growth in 2006. Microsoft is a non-investment-banking client of the firm.

Overall server industry shipment growth is expected to slow to only 4% in 2008, from 9% in 2006, largely because of virtualization and multi-core processors, Holt wrote in a recent report on Microsoft servers.

Desktop virtualization is rarely used but is expected to take off because of its ability to simplify management of employees' laptops and remote access to corporate networks.

Microsoft is also filling out its virtualization management tools. One element of this is an expansion of its partnership with

Citrix

(CTXS) - Get Report

, which acquired the open-source virtualization provider XenSource in 2007. Microsoft and Citrix will approach their common customers as a team, and they are building management tools to make their virtualization products and operating systems work seamlessly together.

Microsoft is also hoping to encourage broad adoption of its virtualization software by simplifying licensing and lowering the price of Windows on virtualized computers. Home editions of the software faced licensing restrictions that had been lifted from business versions running on virtualized PCs. Vista Enterprise Centralized Desktop will now cost users $23 a year, half the previous charge, the company announced Tuesday.

The true threat today to Microsoft is not virtualization but higher adoption of Linux open-source software, Krans said. Virtualization helps Microsoft deal with that threat. The company is encouraging adoption of its virtualization "so they can retain ownership of the operating system layer," he added.

Microsoft's "technology is not up to VMware's standards, but because of their presence in these

customer accounts already, they're going to have a certain amount of adoption," Krans said.

Shares of Microsoft were recently off $1.08, or 3.3%, to $31.93.