VMware Needs to Fend Off Microsoft

Investors will be looking for VMware to come up with plans to counter Microsoft's push into its turf.
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SAN FRANCISCO - Shareholders and IT managers will be paying close attention next week to see what plans VMware (VMW) - Get Report has up its sleeve to meet the stiff challenge it's getting from Microsoft (MSFT) - Get Report.

In particular, investors at the VMworld conference in Las Vegas want to know whether the company merely plans to reset the technology bar as it did last year, or announce a broader strategy of data-center virtualization.

Since Microsoft began to encroach on VMware's server virtualization terrain in 2008, VMware shares have plummeted some 60% and its revenue growth projections have shriveled.

Whether VMware will lose some of its dominance among corporate customers depends to a large extent on whether it extends its engineering lead next year with products that advance the technology beyond server consolidation.

Microsoft

has delivered its first virtualization product and plans to ship two more by early October that partially replicate some basic and management components of VMware's line.

VMware is expecting 14,000 attendees for the conference, up 27% from 11,000 last year.

In September 2007, shares of VMware rose 10% after the company announced products and directions the day before the conference began. VMware then outlined a new desktop virtualization strategy and introduced software for manufacturers to embed into servers before they are shipped.

Those launches only extended VMware's traditional focus on server consolidation and pushed virtualization downstream to the client -- both easy directions for Microsoft to emulate.

In early July, the Palo Alto, Calif. company revised its full-year revenue growth to a range of 42% to 45% year over year, from 50%. That falls far short of VMware's 2007 growth of 88%.

Analysts expect full-year 2008 revenue of nearly $1.9 billion, according to Thomson Reuters.

VMware is a company in transition. Its board, under the direction of majority owner

EMC

(EMC)

, removed CEO Diane Greene in July, naming former Microsoft executive Paul Maritz to replace her.

But don't look for Maritz's imprint on the product strategy after just two months: Software products generally take years to gestate from conception through development and testing.

For VMware to truly differentiate itself from Microsoft going forward, it must reveal its roadmap, says Zeus Kerravala, enterprise research analyst at the Yankee Group. He predicts VMware will outline its "vision of cloud computing" on Sept. 15.

Cloud computing takes virtualization beyond the concept of consolidating individual servers in a data center to completely freeing applications from their hardware, so that software may be moved at any time within and among data centers both within and outside the corporation -- without disrupting software users.

Web hosting companies like

Savvis

(SVVS)

provide cloud services, such as email hosting.

Amazon

(AMZN) - Get Report

and others have also launched cloud services.

Even if VMware takes its software strategy to the cloud, Kerravala questions whether corporations are ready to think beyond server consolidation, a tactic for saving on hardware and energy costs. Using virtualization to create data centers in the cloud is strategic, rather than tactical, thinking, he adds.

Selling the cloud strategy will be more difficult than selling basic consolidation but it would be the surest way for VMware to avoid the trap of commoditized pricing, Kerravala says.

He also expects contributions at VMworld from the company's partners, who give VMware an edge over Microsoft, which does not have many virtualization partners.

VMware's ecosystem of partners keeps its advanced software from becoming commoditized, because those companies add to the selection of products that work together, Kerravala says. "VMware becomes the virtualization platform to build on, which keeps their value and market share where it is," he says.

"People will pay a premium for VMware

products if there's a large ecosystem around it," Kerravala says.