The virtualization market: The real scrum is just beginning

VMware's first quarter as a public company was a humdinger, but the real battle in the virtualization market is just getting started. Over the next year or so the virtualization landscape is going to become a lot more interesting.

VMware is a company with a lead and big plans to keep it. To most folks, VMware is synonymous with virtualization, the technology that allows you to cram multiple operating system on a server.

Indeed, VMware on Wednesday reported third quarter earnings of $65 million, or 18 cents a share, on revenue of $358 million. Revenue was up 90 percent from a year ago. Excluding charges, VMware reported net income of $85 million, or 23 cents a share. Wall Street was expecting 17 cents a share on sales of $334 million, according to Thomson Financial. The company, however, didn't provide an outlook for future quarters.

From the research notes, the only real concern was VMware's deferred revenue, which was below some expectations. A lower tax rate also helped VMware's earnings per share, said Cowen & Co. Walter Pritchard. But nearly every analyst on Wall Street has noted the real story for VMware: It doesn't have much competition right now.

Simply put, VMware has an open field and the game is to pad its lead as much as possible before competition arrives. "We are impressed by evidence that the company is not resting ahead of looming serious competition in the form of Microsoft and Citrix and continuing to invest to maintain and even extend its product market lead," wrote ThinkEquity Partners analyst Jonathan Ruykhaver in a research note.

However, this VMware equals virtualization theme won't last forever.

And that's when things get interesting. Today, virtualization is really a game of server and data center consolidation. The return on investment case is relatively simple. More computing power, less hardware and potential savings on energy costs. As the midmarket adopts virtualization that story will change a bit.

Meanwhile, there's an architecture argument brewing. When it comes to virtualization VMware has done a lot of heavy lifting to make its software work. VMware is becoming a software platform to itself in the enterprise. However, an alternate view to the virtualization landscape is one where the "hypervisor," the go-between between hardware and software in virtual environments, is merely built into the hardware platform.

This virtualization as hardware play is the vision of Simon Crosby, CTO Xensource, which is now a Citrix company. At Interop on Wednesday Crosby said his goal is to commoditize the hypervisor. In other words, virtualization will just be built into hardware.

Crosby noted that Xen, Xensource's hypervisor will be built into Dell servers. "We're not building a new VMware," said Crosby. "VMware has built a company on feature sets to become a one stop shop. Our desire is to completely commoditize the platform and deliver virtualization everywhere."

If that plan sounds vaguely familiar that's because it is. Microsoft has a similar plan for its Viridian hypervisor, which is expected to launch with Longhorn Server. But Microsoft's virtualization technology has been put off so long I wouldn’t recommend holding your breath for it.

But when Microsoft does get its act together it too will be tightly coupled with hardware designs.

Simply put, you have roughly three visions. VMware's concept where virtualization is a software platform that manages your infrastructure. Other companies like Red Hat see virtualization as something that goes along with an operating system. And the Xensource and Microsoft theme where virtualization is just something that comes with the hardware. Intel and AMD both have hardware assisted virtualization and most operating systems will become virtualization enlightened. In other words, everything will become a virtual machine.

Crosby's idea is to make virtualization a commodity and then sell virtualized services on top of it. The other theme: Broaden virtualization beyond servers to the desktop where Citrix's product lineup will make a lot of sense.

Margaret Lewis, director of commercial solutions at AMD, said all of those aforementioned virtualization approaches make sense. And it's likely there will be some hybrid approach to surface. In some situations a software layered approach works due to easier management of infrastructure. That said, the hardware approach makes a lot of sense too. "We're likely to see a blended model," said Lewis.

"We provide the hardware hooks to make virtualization as near native as possible," said Lewis. Lewis has an interesting perspective since AMD used VMware to consolidate 135 IT services servers to 9 (I'll detail more of this in a future post). On the product side AMD, like Intel, is working with all of the virtualization players.

According to Lewis, spinning off virtual environments will be a snap when virtualization becomes standard on all servers. That development will open new markets. Today, virtualization is a server-based market. In the future, home media centers will utilize it. As will your desktop PC. Imagine a home server with four or five virtual machines on it with games, TV programs, music and other entertainment, said Crosby.

The tight links between virtualization and hardware is likely to give Xensource and Microsoft a fighting chance against VMware. Without hardware integration, Xensource and Microsoft would have to replicate VMware's software approach just to get on the field.

The next logical extension to this theme would be virtualization on a chip. If you can put a 3G phone on a chip why not offload some of the virtualization features to semiconductors? Lewis said the virtualization on a chip concept is possible, but there are hurdles--semiconductor designs are put in place years before a launch. Any software would be dated by time a chip launched. "But you could put parts of the hypervisor on a processor," said Lewis. "A lot of what we can do is talk to the vendors to see what parts could be offloaded to the processor."

Note: I brought up the virtualization on a chip thing as a hypothetical. AMD doesn't have anything on the drawing board. Bottom line: The fun is only beginning on the virtualization front.