VMware Takes Aim at Microsoft

The company plans to emphasize its expertise in virtualization at the data center level.
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SAN FRANCISCO - With its market dominance under assault, VMware (VMW) - Get Report came out slugging Monday with a product roadmap intended to put Microsoft (MSFT) - Get Report on the defensive.

At the company's annual conference in Las Vegas, VMware shifted the conversation away from server operating systems by announcing products for virtualization at the data center level.

The roadmap also calls for products for cloud-computing service providers -- a new but growing business opportunity.

By framing the argument to its own advantage, VMware is giving its sales team a powerful argument in competitive situations.

Tom Bittman, an analyst with Gartner, said the Palo Alto, Calif.-based firm can maintain its two- to three-year technology lead on Microsoft with these initiatives.

Bittman also said the moves bear the stamp of chief executive Paul Maritz, who replaced ousted CEO Diane Greene only two months ago.

Maritz is a former Microsoft executive with an expertise in cloud computing, and his marketing savvy is evident in the positioning of VMware's strengths relative to Microsoft.

VMware's bread and butter had been its virtualization software, which enables IT departments to use servers more efficiently, reducing equipment and energy costs. It expects revenue of $1.9 billion this year, according to Thomson Reuters. Microsoft released its first virtualization product in mid-2008 and will ship others in October.

Since

Microsoft

began to encroach on VMware's server virtualization terrain in 2008, however,

VMware's revenue growth

projections have dwindled. In early July, the company reported second-quarter top-line growth of 54% year over year, but revised the full-year rate to a range of 42% to 45%, from 50%. That's half the 2007 growth rate of 88%.

Staggered by the sudden drop in momentum, investors baled on the stock, whose value has fallen some 60% year to date. VMware has lost 15% since early July, as investors awaited a clearer strategy from Maritz.

On Friday, VMware shares closed up $1.69, or 4.9%, to $35.95 in anticipation of a run up in the stock comparable to its 10% gain scored this time last year as VMworld 2007 opened. Shares were recently off $8.04, or 8.5%, to $32.90 as turmoil in the financial sector drove tech stocks lower.

Despite VMware's announcements, Microsoft still is in a very strong position: By building virtualization into its server and tools software, it lowers the entry price and simplifies the choice for companies already using the products.

The fledgling cloud-computing business includes a host of potential new customers for VMware.

Amazon

(AMZN) - Get Report

has led the way into cloud services by allowing anyone to rent space and run applications on servers at its facilities.

VMware cloud partners announced today include

Savvis

(SVVS)

,

BT Group

and

Sungard

.

Several companies, such as

IBM

(IBM) - Get Report

, are pouring massive investments into cloud computing centers. Microsoft is widely expected to elaborate on its cloud-services plans at a meeting in October.

While Microsoft probably will not become a customer of VMware, many smaller cloud providers will, Bittman says.

Cloud computing refers to running software on hardware anywhere in the world by disassociating the programs from specific physical servers.

Selling to cloud providers will help VMware tap the small-business market indirectly, Bittman says.

Until now, VMware has picked up just 1% to 2% of the small- to medium-sized business (SMB) market.

By helping cloud providers, VMware could make it harder for Microsoft to sell into the SMB market, "where Microsoft is going to dominate," Bittman said.