Update: VMware questions rivals' virtualization strategies

Company's president makes the case that third-party virtualization is superior to virtualization built into an OS

The president of virtualization software leader VMware on Wednesday questioned the strategy of rivals that are integrating virtualization functionality into their operating systems.

Diane Greene made the comments at the third and final day of the Morgan Stanley Technology Conference in San Francisco.

VMware, a subsidiary of storage vendor EMC, doubled revenue in EMC's latest quarterly report, compared to the year ago quarter, as enterprises embrace VMware's virtualization software to make more efficient use of the servers in their data centers.

Rivals such as Red Hat and Microsoft have responded to VMware's dominance by integrating virtualization into coming new operating systems. Red Hat is introducing Red Hat Enterprise Linux 5 next week and Microsoft's new Windows server OS is due later this year.

But Greene, in discussing virtualization with analysts for the investment firm, said she wonders how effective the competition's virtualization features can be.

"Traditionally, the operating system manages the hardware and manages the application. Once you virtualize with a hypervisor, that is now what is managing the hardware, not the OS," Greene said, in a presentation that was distributed via webcast. "Now the operating system is just managing the application. So certainly Windows and Red Hat are moving to integrate virtualization into their OS, but part of the value proposition seems to be lost when you do that."

Spokespeople for Red Hat did not respond to a request for comment, but a spokesman for Microsoft said its OS easily supports virtualization.

"Resource management has always been part of operating systems. Today, vendors such as Sun, Novell, and Red Hat incorporate virtualization into their operating systems," wrote Patrick O'Rourke, a senior product manager for Windows Server, in a prepared statement. "We are making investments across Microsoft to offer our customers a complete set of virtualization products from the desktop to the datacenter. All assets, both virtual and physical, [are] managed from a single platform."

VMware is a strong contributor to the earnings of parent company EMC, which also sells storage hardware and security software. Greene also is executive vice president of EMC.

Revenue for VMware increased to $232 million in the fourth quarter of 2006, 101 percent more than a year prior. The growth comes from increased demand for VMware Infrastructure 3, a virtualization software suite for servers and storage networks.

VMware's growth prompted EMC to recently announce plans to spin off 10 percent of VMware in an initial public offering of stock. EMC executives said they anticipate releasing the prospectus later this month for the IPO, expected about midyear.

Greene noted the stock sale will benefit VMware employees as well as potential shareholders.

"Our stock-based compensation will track our performance and that is the ideal model," she said.

Also at the Morgan Stanley conference, Greene acknowledged that virtualizing servers, which helps them use more of their designed capacity, may suppress server sales growth. But she said many customers are upgrading servers as they introduce virtualization into their operations. Those new servers are more high-end products, with greater processing power, and should yield higher margins for server vendors.

EMC reported fourth quarter 2006 financial results Jan. 23, posting net income of $389 million, or $0.17 a share, on revenue of $3.21 billion. It edged out analysts estimates of $0.16 a share.

Copyright © 2007 IDG Communications, Inc.

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