This syndicated post originally appeared at Zeus Kerravala's blog.

Remember this blog post?

It’s my now infamous “Bell tolls for thee” blog that I authored just after VMworld last year. This was the blog for which I was so soundly flogged by the VMware community in the comments section, and even received a few nasty emails. (By the way, I do want to thank all of the people who comment on my blogs. Whether you agree or disagree with me, it’s always good to have the feedback. 

– BACKGROUND: VMware, the bell tolls for thee, and Microsoft is ringing it

Well, it appears the bell has indeed rung for VMware. Late last month, VMware held its most recent quarterly call to go over financial numbers, and all appeared well. After announcing a record December quarter and great earnings, VMware management lowered the boom. The outlook for the current quarter and the current year were both substantially lower than consensus estimates, marking several consecutive years of slowing revenue growth. 

Investors have feared a slow down in the core virtualization business for a couple of years now, and VMware had managed to keep the street at bay. But, as the old axiom goes, all good things must come to an end. VMware’s stock price, which was once a gaudy $115, has fallen all the way to a shade under $80 per share. The great momentum that VMware had is coming to an end as its virtualization business slows down.

The Microsoft impact

If you remember, VMware repealed its unpopular and highly controversial VRAM pricing at VMworld, but the damage was done. It’s my belief that, by altering its pricing strategy, VMware cracked the door open for someone to step in, and Microsoft did just that.

Now, I’m not saying that Microsoft is going to overtake VMware as the thought leader of the space, nor do I feel that Hyper-V is even close to VMware in functionality. However, I do believe that many customers find Hyper-V “good enough” for many workloads. Small and mid-sized businesses in particular do not need all of the bells and whistles of vSphere, and the out-of-the-box Hyper-V will do just fine. I also think large enterprises will use Hyper-V in branch offices or other places where good enough is indeed good enough.

Another reason we may be seeing a slowdown in VMware is that the ecosystem around the hypervisor is willing to support both Hyper-V and Xen now. When you’re working with company X and they only support VMware, it’s kind of hard to pick anything else. If company X now supports other options, those options become available to the customer.

I also think VMware has been driving its ecosystem to look for alternatives. As the data center continues to evolve, there is a definite land grab going on as vendors look to move into other areas, stepping on their partners’ toes in the process. In many ways, VMware has become the software version of Oracle, where they are become more vertically integrated. The acquisition of Nicira is an example, when it stepped on Cisco’s toes despite Cisco wanting to keep the relationship alive. Fast forward and we see Cisco moving closer to Microsoft and Network Appliance. VMware wants to do more on its own, and that created a bigger pool of enemies.

By no means do I believe the ride VMware has been on is over, but the data center market is in transition. Great companies use these transitions to break away from the competition. Right now, it appears that VMware is moving back to the pack, so only time will tell whether VMware is great or, like Hyper-V, good enough.

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Zeus Kerravala

Zeus Kerravala is the founder and principal analyst with ZK Research. Kerravala provides a mix of tactical advice to help his clients in the current business climate and long term strategic advice.
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