VMware Should Run a Cloud or Stop Charging for the Hypervisor (or both)

I had a number of conversations this past week at CloudConnect in Santa Clara regarding the relative offerings of Microsoft and VMware in the cloud market.  Microsoft is going the vertically integrated route by offering their own Windows Azure cloud with a variety of interesting and innovated features.  VMware, in contrast, is focused on building out their vCloud network of service providers that would use VMware virtualization in their clouds. VMware wants to get by with a little help from their friends.

The problem is that few service providers are really VMware’s friend in the long run.  Sure, some enterprise-oriented providers will provide VMware capabilities to their customers, but it is highly likely that they will quickly offer support for other hypervisors (Xen, Hyper-V, KVM).  The primary reason for this is cost.  VMware charges too much for the hypervisor, making it hard to be price-competitive vs. non-VMware clouds.  You might expect to see service providers move to a tiered pricing model where the incremental cost for VMware might be passed onto the end-customers, which will incentivize migration to the cheaper solutions.  If they want to continue this channel approach but stop enterprises from migrating their apps to Xen, perhaps VMware needs to give away the hypervisor – or at least drop the price to a level that it is easy to absorb and still maintain profitability ($1/month per VM – billed by the hour at $0.0014 per hour plus some modest annual support fee would be ideal).

Think about it… If every enterprise-oriented cloud provider lost their incentive to go to Xen, VMware would win.  Being the default hypervisor for all of these clouds would provide even more incentive for enterprise customers to continue to adopt VMware for internal deployments  (which is where VMware makes all of their money).  Further, if they offered something truly differentiated (no, not vMotion or DRS), then they could charge a premium.

If VMware does not make this change, I believe that they can kiss their position in the cloud goodbye in the next 2 years or so.  Their alternative at that point is to offer their own cloud service to capture the value from their enterprise relationships and dominant position.  They can copy the vertically integrated strategy of Microsoft to make push-button deployment to their cloud service from both Spring and vCenter.  This has some nice advantages to them culturally as well.  VMware has a reasonably large enterprise sales force (especially when combined with EMC’s…), and these high-paid guns are unlikely to get any compensation when a customer migrates to Terremark.  There’s a separate provider sales force that does get paid.  If VMware created their own managed service and compensated their direct reps to sell it, adoption would soar.  With their position in the developer community via the Spring acquisition, they’ll get some easy low-hanging fruit as well. 

Now, put these concepts together – free hypervisor and managed offering.  Would they lose their services providers?  I doubt it.  Enterprises want choices while continuing to use what they already know.  Terremark, Savvis, and others will have good marketing success with VMware as long as it doesn’t break their financial model.  Further, VMware’s “rising tide” would actually float all of the other VMware-based service providers and help them to better position against and compete with the Xen-based mass-market clouds.  A “VMware Inside” campaign that actually promoted other service providers would also help. 

Being in the managed services space is a very different business for VMware.  The margins are lower, but they could build a very large and profitable cloud offering with their position in the enterprise.  Similarly, a unified communications service based on Zimbra would give them even more value to sell (and to offer through vCloud partners).  As long as they remove the financial incentive for providers to switch to Xen at the same time, they could have a very strong play in this space.

If VMware does not at least make the pricing change for service providers, their future in the cloud is very much at risk. 

p.s. While they’re at it, VMware needs to allow us to integrate directly with ESX and get rid of vCenter in a service provider environment.

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