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VMware to Undergo Major Strategy Shift

By Richard Adhikari

July 9, 2008

VMware

UPDATED: Diane Greene's ouster as CEO of VMware may have been sudden, but it was not a spur-of-the-moment thing; parent company EMC had been planning it for months, observers say.

As increasing competition and the ready availability of free hypervisors eroded VMware's dominant position in the market, the company's board of directors wanted the technology-driven company to become more business-driven, but considered Greene lacked the business skills to take it to the next level.

Her resistance to change and frequent clashes with EMC (NYSE: EMC) CEO Joe Tucci further exacerbated the situation, industry observers say. "There has been bad blood between Diane and EMC for many years," Rachel Chalmers, 451 Group research director, said.

When EMC bought up Pi and took its founder and CEO, former Microsoft (NASDAQ: MSFT) senior executive Paul Maritz on board in February, observers felt Greene's time was running out.

"I felt at the time that EMC didn't acquire Pi to have yet another data workflow product in their suite," Carl Howe, Yankee Group's director of enterprise software research told InternetNews.com.

Maritz, who had led Microsoft's Windows 95 and Windows NT efforts and its database, tools and applications divisions, was seen as having the business experience Greene lacked. Another point in his favor was that, as a former senior executive at Microsoft, he knew how that company, which had VMware (NYSE: VMW) squarely in its sights, worked.

"They wanted to get somebody who has talent and who can fight a good battle, particularly against a competitor with deep pockets. I think Diane's departure was engineered," said Howe.

Maritz is also famously combative, being willing to do what it takes to win, which observers say is yet another factor in his favor. He reportedly said Microsoft would "cut off Netscape's air supply" when Netscape led Microsoft in the battle for the browser market, but later denied making the statement.

EMC is certainly looking to tap Maritz's skills. "VMware's growing at roughly 50 percent a year, and as the business continues to grow, it becomes more complex and needs a more seasoned leader to deal with the complexity," EMC spokesperson Dave Farmer told InternetNews.com.

EMC had good reason to plan a change of management at VMware. It had paid out $1.1 billion to purchase VMware with an eye to bundling the software with its own storage products, but couldn't do so because Greene flat-out refused. Also, Greene wanted as little to do with EMC as possible, requesting that EMC assign one executive to handle all dealings between the two companies.

Further, Greene's meager business skills were stretched to the limit by the popularity of VMware's products. "Everybody wanted a piece of VMware and there was a lot of jockeying among partners, but they didn't have the expertise to deal with that smoothly," said Jay Litkey, founder and CEO of Embotics, who described his firm as "a very good partner" of both VMware and Microsoft.

However, it's still struggling with its roadmap, and "everybody, whether they were a very large or a small company, found it very challenging to work with them," Litkey said.

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Turning up the heat on VMware

Meanwhile, the competition was ramping up -- Citrix unveiled a new version of its desktop product, Red Hat announced support for KVM, which is a hypervisor embedded in the Linux kernel, and Microsoft suddenly moved up the release of its Hyper-V hypervisor from early August to June, all in the space of about two months.

That "put a lot of pressure on VMware to do something different," but Greene wasn't going to budge, and her vision "wasn't going to satisfy the market in the long term," said Andi Mann, research director at Enterprise Management Associates.

Hyper-V is available at a nominal charge, and many other operating systems, such as Unix, Linux and several mainframe operating systems, include a hypervisor for free. But VMware charges $495 a pop for its ESXi hypervisor, although it also offers a free, limited server VMware Server, currently in beta.

The high price of ESXi "flew in the face of market pressure," Mann said, especially as his research in April, when Hyper-V was still in beta, showed that 30 percent of enterprises planned to adopt Hyper-V.

That's not all: Hypervisors based on the Xen open source product, from Oracle, Sun, Virtual Iron and Citrix, have 44 percent of the enterprise market. How could VMware then claim to have 85 percent of the virtualization market? Simple: There are several different types of virtualization -- server, operating system, application and desktop.

The average enterprise has 11 different virtualization technologies, platforms and vendors, and the environment will continue to be very heterogeneous, Mann said. "There's still lots of room for everyone to play and VMware had taken the attitude that they'd won, and you can't do that, especially when Microsoft has entered the market."

Greene's ouster was part of a natural evolution because she "may not be the right person for the next phase, which is dealing with competition, and with partnerships," Gartner vice president Tom Bittman told InternetNews.com. "It's hard to find a partner who was happy working with VMware."

Maritz is expected to make several changes, and observers consider him the right man for the job. "VMware needs to become a very competitive, business-driven company, and the hiring of an ex-Microsoft person as their CEO is a smart move because he understands from the inside how Microsoft operates and how to deal with things," Embotics' Litkey said.

VMware now has to fill out its portfolio, look at more acquisitions, see how the companies it acquired over the past year will work together, and do acquisition management, Mann said. EMC "wants to change the control structure," which is why it appointed Maritz to VMware's board of directors, as a sign that change will be driven from the top.

Maritz may have to look further afield than just at Microsoft. While the Redmond giant looms large in VMware's vision, "ultimately the money will be in virtual datacenter management, and you're now looking at IBM's Tivoli, HP's OpenView, CA and BMC," Litkey said.

Cisco (NASDAQ: CSCO) and Symantec (NASDAQ: SYMC) have also stated they want to be major players in the virtualization market, and Litkey expects a major shakeout and several consolidations over the next few years. "There's not enough spots to have five, six, seven, eight gorillas in any marketplace, and there's going to be a tremendous struggle among the players to be among the top three," he added.

That may just be the ticket for Maritz. The man who developed the style of bare-knuckle fighting with which Microsoft crushed Netscape might just be able to use it to bring VMware back to market leadership.

(Updated to include the comment from 451 Group's Chalmers.)