Virtualization is probably going to remain the dominant technology theme this year – it emerged as the main IT theme last year and sent VMware’s shares rocketing skywards (see The EMC Paradox). The driving force for virtualization is cost reduction via server consolidation and (to a lesser extent) client virtualization – which means running PCs on servers in one way or another.

Here are the practical advantages:

• It reduces data center space requirements.
• It reduces data center cooling requirements.
• It reduces power requirements (and hence is green).
• It improved availability/recovery.
• It lowers hardware costs.
• Client virtualization reduces desktop management costs.

All the gains are significant and they may be considerable. They can be achieved reasonably quickly and are likely to deliver fast ROI. For a while VMware had the market to itself. So it grew at about 100% per annum, got big and became highly profitable. To no-one’s surprise, competitors emerged. Here’s a breif summary of the major ones:

Server Vendors (Competing Directly): IBM, Hewlett-Packard, Dell and Sun are natural partners for VMware, providing servers for VMware to run on, but three of them are also natural competitors. IBM has been “virtualizing” on the mainframe since the IT industry was an infant and knows how to build a hypervisor. Actually, so do both HP and Sun, although they are newer to the game. Dell is not in the software business and prefers to partner, but recently announced that it would embed a hypervisor in its servers.

The problem is that server vendors see operating software as their territory and valuable territory at that. When you provide “commodity hardware” it’s the major differentiating point. It is therefore likely that IBM, HP and Sun will move into the market at some point.

Server Vendors (Competing Indirectly): The server vendors also provide client virtualization, by putting the PC on a server blade, linked from the data center to a keyboard and display on the desktop. Client virtualization, puts the hardware vendors into co-opetition with VMware – advocating VMware virtualization for some PC blades (for lightly used PCs) and sometimes advocating a PC blade per desktop (for more heavily used PCs).

Microsoft: Microsoft is unique as the vendor of a pervasive client and server OS. It has a slightly different interest to the server vendors. It clearly as no intention of standing in the corner while VMware turns Windows into nothing more than a program execution environment. It is on the verge of competing head-to-head with VMware and will probably bundle its Hyper-V technology in with the OS. This could be tough competition for VMware.

Red Hat and Novell: Linux providers Red Hat and Novell are Microsoft’s direct OS competition. Both companies include the Xen Open Source hypervisor as part of their Linux offerings. Of course, Red Hat and Novell also compete directly with each other – Red Hat having about twice Novell’s share of the Linux market. Both vendors provide the Xen hypervisor at no cost.

Other Software Vendors – Citrix: Citrix has focused on client management technologies, including support for thin clients for more than a decade. It is currently equivalent in size to VMware, but not growing anything like as fast. However it has a much more complete software portfolio for client management and it has recently acquired Xen Source, the company behind the Xen, the Open Source competitor to VMware. It recently released Citrix XenServer Express Edition, for free in direct competition with VMware.

Other Software Vendors – Parallels: Previously named SWsoft (the corporate name change is currently taking place), Parallels was first to market with virtualization for the Apple Mac. It also has hosting software that it sells to ISPs. (This web site uses Virtuozzo server virtualization and Plesk host management). It competes directly with VMware both on the client and the server

Other Software Vendors – Oracle: Oracle decided to step into this market in November, releasing its own free version Hypervisor based on Xen and including a web management console (Oracle will charge for support). This surprised some commentators, but it is consistent with Oracle’s long term technical strategy to provide “the whole stack” and concentrate value where it has assets, in the application layer and in the database.

The Virtualization Race

None of the above companies could be described as half-hearted players in the emerging virtualization market. On the surface of it, it might seem as though VMware is surrounded and in trouble. It is certainly being challenged, but it has a number of advantages (see this previous posting). Its biggest advantage is that virtualization is its business, and right now it is involved in many large scale virtualization projects – which proves its scalability and provides it with expertise “on the ground”.

Nevertheless, the ground is moving beneath its feet with license fees for hypervisors decreasing or vanishing, leaving the management software, consultancy and support to become the primary points of value. VMware is going to have to adjust to that fairly rapidly. Additionally, there is a move afoot to embed the hypervisor in the hardware, which may make soft hypervisors unnecessary in many situations. (Dell is doing this and other vendors will probably follow).

The whole picture is complex. Currently, only an estimated 10 percent of x86 servers are virtualized. The figure is unlikely to go beyond 60 percent because not all servers are candidates for virtualization. The other 40 percent or so consume far too much i/o or cpu for virtualization to deliver any benefit. This suggests that the total software market for the virtualization of existing servers (for consolidation) is probably no greater than $10 billion. The client virtualization software market could be as large perhaps, but no larger.

Clearly, this places a serious question mark against VMware’s current market valuation. VMware may outdistance much of the competition, but even if it does, it will probably not grow beyond revenues of $3-$5 billion in this sector. There’s not enough revenue for more than that. Bear in mind also that its competitors (actual and potential) include Microsoft, IBM, HP, Dell and Oracle. That amounts to 5 of the 10 largest IT vendors.

The virtualization race has begun, we’ll see who wins.

This is a posting in the Virtualization Focus Series. Click here to see an index of such postings.