Don't Count VMware Out In Rough Seas

Jul 22, 2013 (05:07 AM EDT)

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Wall Street talks VMware down, key executives exit and industry pundits continue to pile on the criticism. But VMware can bounce back from this down cycle, if it focuses on its identity as a supplier of fundamental data center software.

EvercoreWealth Management analyst Kirk Materne recently downgraded VMware's target stock price from $85 to $75 because of uncertainty over VMware's ability to compete with Amazon Web Services, Microsoft Azure and OpenStack.

It wasn't so long ago that VMware posted a price of $103. In a year when technology stocks are generally up, VMware is down 25%.

Comments in the general press on VMware's future are also more skeptical, when they aren't downright dubious, such as this recent GigaOm article, "VMware's Hot Seat Getting Hotter By The Minute."

I'm not immune to the signs that spur these comments. But I'm going to say, with no claim to omniscience, that they're potentially overwrought.

The view behind many of them is that lower-priced substitutes for VMware are now readily available in the enterprise, while its efforts to move out into the cloud are sputtering or going nowhere.

Reviewers are confusing the slow progress of VMware's overarching ambitions with the core strength of the company. To me, VMware can fail at becoming a public cloud supplier and still remain a strong software supplier. There are people inside VMware who would disagree with me on that. But right now, the financial community and the press are simply taking VMware too much at its word that it must be a dominant player in cloud computing.

They also take it at its word that it needs to become a software-defined networking vendor, that it needs to produce the software-defined data center -- and do so immediately. We're trying to convert what should be a marathon into a 100-yard dash.

What's the worst that can happen if VMware only begrudgingly succeeds, or perhaps fails, at providing the software to power dozens or hundreds of public cloud data centers? Will its whole vCloud Hybrid Service initiative collapse, along with its prospects for the future? Not necessarily.

VMware may want to "own" the enterprise cloud compute task the same way that it dominates the heart of the virtualized data center. That is, if its products are managing the job inside the enterprise data center, then those products should follow when the job moves to the cloud. This is the thinking that builds software dynasties.

One only needs to think about Microsoft's expansion from owning the desktop operating system to owning the desktop application suite, or Oracle's move from owning the database to owning the applications that use the database. Every software company believes it must expand relentlessly from its core to more and more of the customer's infrastructure ... or what? It will wither and die? In this sense, every software company is an empire builder.

If it's true in business that good health is associated with expansion, there's no truth whatsoever -- in business or anywhere else -- that the wrong kind of expansion is associated with agility. For VMware, agility in capitalizing on its ownership of data center virtualization is what's called for now. VMware owns 80% of the market among those serious about virtualization, according to this analysis from Core Equity Research.

VMware's recent product moves show it has a lot of potential left for managing that new environment. Sliding a hypervisor in between the operating system and hardware converts the data center into something that it wasn't before. Each device, instead of being a concrete block, becomes a fluid, mercurial asset that can be reconfigured on the fly by software. Get enough operational intelligence into the software, and the device will start being utilized at 60% or 70% instead of 15%. The whole data center starts to hum.

VMware may want to follow the workload outside the enterprise data center, but it doesn't have to. If it focuses inside the data center, that doesn't mean its customers will have nowhere to turn for cloud computing. It means only that the workload will be converted from a VMware virtual machine file into someone else's, a perfectly plausible, logical way for the end user to navigate the movement into the cloud. That means, of course, someone else's virtual machine formatting and hypervisor will be used once the workload gets there. So what?

What about all those exec departures, particularly Rick Jackson, VMware chief marketing officer, to Rackspace, Tod Nielsen to Salesforce's Heroku, and Bogomil Balkansky to Diane Greene's stealth startup? Jackson was associated with, probably against his will, selling the "vtax," VMware's untimely vRAM pricing change in 2011, which VMware later rolled back. When a new regime comes in, and you're associated with an old failure, you move on.

Tod Nielsen, a business executive who knows the ins and outs of dealing with software developers, always had other opportunities. The shift of both himself and his friend Paul Maritz to the EMC/VMware spinoff, Pivotal, provided him the impetus.

The bright and versatile Balkansky's move is more of a mystery, until he decides to talk about it. Getting word to him through third parties does no good; he's not ready to talk.

The departure much earlier of CTO Steve Herrod was a monumental loss, one that, if I were new CEO Pat Gelsinger, I would have tried hard to avoid. But losses in the business world are inevitable, sometimes for good reasons, sometimes for bad. Herrod was a grad student of VMware founder Mendel Rosenblum's at Stanford; they worked on the SimOS and other key projects together. He had already been through one wrenching transition when Rosenblum's wife, Diane Greene, was replaced by Maritz, and Rosenblum departed soon after. But it's a tribute to the quality of people attracted to the early VMware that Herrod, the moment he choose to leave, could have gone anywhere he chose.

Companies change as they mature; people come and go, frequently in cycles. VMware will weather the cycle but it will need to make up its mind what kind of company it really is. To survive and prosper in the emerging cloud computing era, it will have to be more than a vassal of EMC. It will need to understand its core strengths and pursue the opportunities associated with them in a highly disciplined fashion.

Can it do so under new CEO Pat Gelsinger? I think so, but VMware must refocus inside the data center and get over its fear that failure to provide cloud services dooms it to be trampled by Amazon and other cloud suppliers.

The cloud will grow and many workloads will migrate there, but many will remain inside the data center. Modernizing data center operations, taking all the data that will flow out of vCenter Log Insight and pouring it into vCenter Operations and vSphere for intelligent use should occupy VMware's attention for the next 18 months.

When VMware announces it's a cloud vendor, it's sailing into stiff headwinds produced by powerful vendors that have grown up in the cloud. As it fails to live up to its own expectations, skeptics paint a dire picture of what happens next. But VMware customers have confidence that VMware will continue to innovate in the creation, deployment and management of virtualized resources. It seems possible to me they will convert some of their compute resources to Microsoft Hyper-V or open source KVM, then ask VMware to manage them as well.

VMware is heeled over by competitive winds -- and possibly too much of the crew leaning toward the cloud side of the ship. To bring this vessel back on course, VMware must go back to fundamentals, refocus on converting the enterprise data center into that flexible asset of the future captured in the phrase "software-defined data center," and move forward from there. Cloud computing will still be there. VMware customers will figure out how to make use of it without abandoning VMware.

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