In mid-December, storage giant EMC announced plans to acquire privately held VMware. It’s EMC’s third acquisition of a software company this year in its drive to transform itself from a storage hardware company into software and services company. In 2003, EMC acquired content management company Documentum and storage software company Legato. These acquisitions, part of EMC’s drive to round out its information management strategy, were complimentary to the company’s core storage business. However, the acquisition of VMware was unexpected.
The acquisition of VMware, known for its server virtualization software, moves EMC into areas of the data center beyond its storage expertise. VMware’s software partitions the system resources of Intel-based servers running Microsoft's Windows or Linux into virtual machines. This allows multiple operating systems to run on the same physical system and allows system resources to be allocated to any operating system as needed. VMware is considered the premier server virtualization software in the market and has several strategic partners such as IBM and HP
According to EMC CEO Joe Tucci, the acquisition is intended to hasten the convergence of server and storage virtualization. According to VMware, the acquisition provides its 370 employees with access to a sales force of 4,500 and a customer service organization of 7,500 that will help accelerate its growth. VMware will run as a subsidiary of EMC and will remain headquartered in Palo Alto, Calif.
EMC intends to announce several joint solutions, maybe as many as 20, but not until later in 2004. One joint solution integrates VMware’s new VMotion software that allows virtual machines to be transferred from one physical system to another without disruption, with EMC’s remote replication technology, SRDF. In a conference call with analysts and in other announcements, both companies insist that VMware’s existing relationships with OEMs and ISVs will be honored and that both companies are committed to openness.
In the short term, as they evaluate the acquisition, current VMware channel and strategic partners that are EMC competitors will hesitate to aggressively resell VMware software and pursue strategic relationships. The acquisition will motivate EMC competitors to develop or acquire their own server virtualization software or to seek relationships with other vendors that offer capabilities similar to VMware. This includes companies like Microsoft, which purchased Connectix Software in 2003. Many of the larger companies are accustomed to being competitors and partners simultaneously. However, at a minimum, these competitors will want at least one VMware alternative to offer customers and to incorporate into utility computing strategies.
VMware doubled its revenue in 2003 to $100 million; VMware says it expects revenue for 2004 of about $200 million. It’s not likely that EMC’s sales force will be able increase VMware’s sales significantly beyond expectations and it will be some time before we see EMC and VMware joint solutions delivered to the market.
Vendor Winners and Losers
- Key VMware’s partners, such as IBM and HP, will re-evaluate their current partnerships now that the company is a subsidiary of a major competitor. VMware’s strategic partners must decide whether to count on EMC and VMware’s commitment to openness long term and if there are alternatives to VMware.
- VMware will not find it has the massive sales and customer service forces of EMC at its disposal. EMC is still trying to integrate the significant acquisitions of Documentum and Legato. Further, VMware is a technology that is beyond EMC’s core storage expertise. The EMC sales and customer service organizations are not server technology experts. It will take significant time before these field organizations are knowledgeable enough about servers and the joint solutions to sell successfully into new areas of the data center and support installed solutions.
- The acquisition validates VMware’s technology and puts it on better competitive footing with Microsoft. Microsoft attempted to acquire VMware last year but the two companies could not come to terms. Instead, Microsoft acquired Connectix—maker of VirtualPC. The release has been delayed several times, but we expect Microsoft to release a server version of this product in early 2004.
EMC made a bold and surprising acquisition of a software company with excellent technology, but it will not reap the benefits for some time. EMC saw an opportunity to buy a company with a strategically important technology to utility computing and it decided that whether or not it was ready for another acquisition, it couldn’t pass on the opportunity.
- EMC should run VMware as a separate subsidiary but it should also reconsider releasing as many as 20 joint solutions over the next year. EMC sales and customer service organizations cannot absorb the acquisition of another software company in a year. It’s not likely the sales and customer service organizations of EMC or VMware have the capacity to effectively go to market with more than twenty joint solutions. In addition, the release of so many joint solutions contradicts the commitments from both companies that VMware will remain open, independent and free to pursue alliances and relationships with any company.
- IBM, HP and other VMware partners should continue to resell VMware but simultaneously seek alternatives. It will take EMC time to integrate VMware and still longer before it truly leverages the technology to expand its reach beyond storage. In the meantime, VMware is the premier server virtualization software available. However, vendors should aggressively seek alternatives so that they have at least one other option.
- Microsoft needs to release its server virtualization product without another delay. VMware currently enjoys the advantage that comes with being first to market and now it is no longer just a successful startup with 375 employees—it is the subsidiary of major storage company with aspirations to transform itself into a software company and expand its reach throughout the data center.
The Yankee Group originally published this article on 9 January 2004.
- Customers currently evaluating VMware technologies for server virtualization should speak to their server vendors and ensure vendors are committed to supporting the VMware solution. Most server vendors have not commented on the acquisition or have said they were unsure if the acquisition would affect their relationship with VMware.