VMware questions rivals' virtualization

The president of virtualization software leader VMware Inc. 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 Corp., doubled revenue in EMC's latest quarterly report, compared with the same quarter a year ago, as enterprises embrace VMware's virtualization software to make more efficient use of the servers in their data centers.

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

But Greene, in discussing virtualization with analysts, 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 [operating systems], 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 representative for Microsoft said its operating system 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 data center. All assets, both virtual and physical, [are] managed from a single platform."

For its part, VMware is a strong contributor to the earnings of parent company EMC, which also sells storage hardware and security software. Greene is also an executive vice president at Hopkinton, Mass.-based EMC.

Revenue for VMware increased to $232 million in the fourth quarter of 2006, up 101% over the 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% of VMware in an initial public offering of stock. EMC executives said they anticipate releasing the prospectus later this month for the IPO, which is 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 17 cents a share, on revenue of $3.21 billion. It edged out analysts' estimates of 16 cents a share.

Copyright © 2007 IDG Communications, Inc.

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