VMware's purchase of SpringSource for $420 million has sparked a fair amount of head scratching among analysts who argue the virtualization software company paid too much and still failed to solve its Microsoft problem.
Global Equities analyst Trip Chowdhry noted that SpringSource had roughly $10 million in annual revenue. Cowen and Company analyst Walter Pritchard put SpringSource's revenue at $20 million to $40 million a year. Either way, VMware's purchase (Techmeme) was deemed expensive by most analysts.
Wells Fargo analyst Philip Rueppel said:
While the combination of VMware's virtualization technology with SpringSource's application frameworks should support strong innovation in Platform-as-a-Service - a new potential market, the price paid is hefty in our view.
Indeed, the SpringSource purchase is VMware's largest to date. So why would VMware pay up for SpringSource? The Microsoft conundrum. Microsoft is going after VMware with Hyper-V and hasn't been shy about it. Microsoft chief operating officer Kevin Turner touted the company's virtualization market share gains against VMware ahead of Windows Server 2008 R2. Turner said last month at Microsoft's financial analyst powwow:
We've got a great solution. It's a sixth the cost on average of what we see in the marketplace. Evangelizing the tax that VMware is getting from the product is something we look forward to competing with in this environment. Again, it's about getting specific. It is about getting aggressive, and that's where we're headed.
Simply put, VMware has to become more than just a virtualization software company or it risks becoming just a layer to be absorbed in the Microsoft stack. SpringSource gives VMware a Java application play. Of all the analyst reports, Pritchard highlighted the issue best. He wrote:
In our view the acquisition highlights the vulnerability VMware has in its exposure to Microsoft. We estimate north of 80% (may be as high as 90%, with the rest being Linux) of VMware virtual machines are running Windows server and an application developed in Microsoft's .NET environment. This is a key strategic vulnerability as Microsoft has a history of absorbing functionality such as VMW that is essentially a layer in the Microsoft stack. Ultimately SpringSource technology may enable VMW to add enterprise Java workloads to diversify away from Windows. Today, most enterprise Java workloads are considered too complex and high I/O activity prevents them from being virtualized. Advances in computing (core density, higher speed network interface and more efficient software) should enable virtualization of these workloads in the next several years along with Microsoft workloads like Exchange and SQL (database).
The grand plan for VMware. Move upstream and become more than a virtualization vendor. If VMware can push SpringSource enterprise Java applications to its environment the company may have something. However, there are questions about Java's ability to scale in virtualized environments.
In theory, Java applications will be developed in a way that makes the native for running them on VMware. Traditionally within an IT department, developers have handed off applications to the operational teams, who determine how best to run these applications in production. The operational team generally decides whether or not to run the application in a virtual environment and how to management the application. SpringSource had just recently acquired Hyperic, which brought management tools. Although SpringSource OEM'd Hyperic tools we believe Hyperic tools likely have had little traction in production environments.
That take goes along with some of the initial reaction to the VMware purchase I gathered via my contacts. In other words, VMware's SpringSource buy may pay off, but there are multiple wildcards and the real returns won't be seen for two to three years.
And speaking of wildcards, with VMware's SpringSource purchase here are a few more to ponder:
Competition: VMware has typically been development platform independent, but SpringSource changes that fact. VMware may become a rival to IBM and Oracle. Deutsche Bank analyst Todd Raker notes:
VMware's announcement to acquire SpringSource suggests it is attempting to move beyond the virtualization market towards a platform-as-a-service provider. While the end vision is interesting, we are a bit skeptical as we see the potential for customer conflict when VMware tries to sell its own platform vs. its current agnostic approach.
There's also some defense here too. VMware's SpringSource acquisition could squeeze Red Hat in the future.
Open source mojo: Will VMware be able to hang on to SpringSource's strong developer community? The grand plan for VMware is to use SpringSource's popular frameworks to garner an edge in the cloud computing OS wars. The big question: Will there be a clash between SpringSource's community and VMware's plans for its vSphere operating system?
Talent: VMware portrayed the SpringSource deal as a great way to acquire developer talent. Can VMware keep that talent? If it doesn't the SpringSource deal won't pay off.