After Virtualization: VMware’s Valiant Plan to Co-opt the Cloud

VMware has outgrown its name.

The “VM” stands for virtual machines, and the “ware” stands for the software needed to create them. The original idea, based on research in the 1990s by co-founder Mendel Rosenblum, the husband of founding CEO Diane Greene, was to help companies get more performance out of their computers by setting them up to run simulated duplicates of the underlying hardware. These virtual machines would in turn run all guest programs, masking the details of the hardware and making it easy to run many jobs on one computer, or move them between computers.

It was a brilliant concept that would save organizations billions of dollars over the coming years. It meant companies didn’t have to buy new PCs or servers every time they wanted to run additional operating systems and software.

But in a way, VMware (NYSE: VMW) succeeded too well. Just 15 years into the company’s short history, the technology it pioneered has swept through the computing world. Some 65 percent of all corporate servers are now virtualized, more often than not using VMware’s vSphere software. (VMware owns 60 percent of the market; its closest competitor, Microsoft’s HyperV, has only 25 percent.)

By the time Greene left VMware in 2008, it was already clear that the company needed a second act to follow up on the massive success of its server virtualization business. And around the same time, VMware—which has been majority-owned by Hopkinton, MA-based EMC (NYSE: EMC) since 2004—found itself facing an existential threat: the cloud computing revolution.

Thanks to the emergence of public cloud resources like Amazon’s EC2 computing utility and S3 storage service, it suddenly seemed that companies might not need to bother with on-premises hardware at all. They could just buy remote computing power on demand, and let the cloud providers worry about managing the bare metal.

Under its second CEO, Microsoft veteran Paul Maritz, Palo Alto, CA-based VMware undertook a number of new product initiatives and acquisitions aimed at expanding the idea of server virtualization. Now the concept embraces entire data centers—that is, the collections of processors, storage devices, and networks that most companies use to run business-critical applications such as e-mail, document sharing, enterprise resource planning, sales automation, and e-commerce sites

Pat Gelsinger took over at VMware's CEO in September, 2012.

Pat Gelsinger took over at VMware's CEO in September, 2012.

And under its third CEO, Intel veteran Pat Gelsinger, the company is focusing on just three of those initiatives, namely the “software-defined data center,” the “hybrid cloud,” and “end user computing” (the company’s label for desktop virtualization, mobile device management, and a few other legacy businesses). To keep corporate customers from feeling like they have to turn to public clouds to get the flexibility they need, VMware has built or bought software that turns data centers into private clouds: pools of resources that can be lined up for specific jobs faster and more flexibly. And to accommodate users who still want to offload certain jobs to public clouds, the firm is also going into the infrastructure-as-a-service business, by offering a vSphere-friendly alternative to Amazon, Rackspace, and other cloud providers.

So, better names for VMware, at this point, might be VDCware or Cloudware—reflecting the new emphasis on virtualization at the level of data centers and clouds rather than individual machines.

“The heart of VMware is trying to take things that live in the physical world and abstract them, allowing us to automate them,” says Nicolas “Neela” Jacques, VMware’s senior cloud strategist. That goes for servers, storage, and now—with the 2012 acquisition of intelligent-networking startup Nicira—networks. In the software-defined data center and hybrid cloud projects, Jacques says, the common thread is “taking the things that allowed us to be successful in virtualization and applying them more broadly.”

The question now is whether VMware’s new collection of data center management tools, called vCloud Suite, and its public cloud offering, the vCloud Hybrid Service, will catch on fast enough to offset an expected revenue decline from the flagship vSphere product line as it approaches market saturation.

Gelsinger is busy streamlining the 14,000-employee company (about 900 layoffs have been completed) in an effort to make sure it hangs on to its current share-of-wallet with enterprise customers, even as some of their developers and IT managers are inevitably lured away by Amazon-style public clouds and open-source cloud management tools like Open Stack.

Gelsinger told a gathering of VMware sales partners in February that if a computing job goes to Amazon, “you lose, and we have lost forever…We all lose if they end up in these commodity public clouds. We want to extend our franchise from the private cloud into the public cloud and uniquely enable our customers with the benefits of both. Own the corporate workload now and forever.”

It’s a true make-or-break moment for the company. In its favor, it’s got deep expertise in separating computing jobs from the underlying hardware, which should serve it well in the cloud era. But there’s still a danger that VMware could end up like Microsoft, whose strong legacy in PC operating systems has been more of a handicap than a virtue as it has struggled to adapt to the mobile- and cloud-computing revolutions.

In an effort to understand VMware’s deeper strategy, I’ve been talking with executives from across the company. They’re realistic about the risks VMware faces, but seemingly energized by the new focus Gelsinger is bringing to the company’s product lines. And they’re hopeful that the company’s big enterprise customers—if they’re offered the right tools—will see the sense in keeping most of their computing in-house.

Gathering an Industry

In an August 2012 press briefing, shortly after being named as the company’s next CEO, Gelsinger compared VMware to an “adolescent who has grown up too quickly.” He suggested the company’s success with vSphere—pumping up its annual revenues to some $4.6 billion by 2012—came so early and so rapidly that it never had a chance to mature into a focused, disciplined technology business.

But if VMware was an adolescent, at least it had the skills of a prodigy. As a startup located in Palo Alto’s Town & Country Square shopping mall—right above Village Cheese House Deli—the company’s first feat, in 1998, was to get Windows running on a virtual machine. (It took 30 minutes to boot.) That led to the company’s first product, Workstation, which virtualized x86-based computers so that users could do things like run Linux on their Windows machines, and vice-versa.

This was no mean feat, given that Intel had never really designed x86 chips to be virtualized, and that the PCs of the time had to manage so many different peripheral devices. Eleven years later, the achievement would bring Rosenblum and VMware’s other technical co-founders the prestigious ACM Software System Award.

Workstation depended on having a host operating system such as Linux or Windows present to handle input/output operations and other actions. But at the same time, the VMware founders also built a bare-metal version called ESX—for Elastic Sky X—that managed I/O directly. This was VMware’s first “hypervisor”—a virtual machine manager that runs directly on hardware, without a host operating system. And it was the key to opening up a huge new market for the company: corporate data centers.

First released in 2001, ESX quickly became the core of VMware’s enterprise virtualization business. (Today its successor, ESXi, is part of vSphere.) Demand for the technology was epic, allowing the company to grow to 1,500 employees by 2005. Greene, the company’s founding CEO, “was able to gather an entire industry around her vision, based on her husband’s research,” says Jacques, who joined in 2006 and is something of a company historian.

Another key legacy of Greene’s leadership was the independence she won for VMware even after storage giant EMC bought the company in 2004 for $625 million. Says Jacques, “She insisted that EMC not treat us as a subsidiary but allow us to continue as our own entity”—an arrangement she believed would bring VMware the heft of a large company without sacrificing the nimbleness of a startup.

Less than three years after the acquisition, Greene engineered an unusual public offering in which the company put 10 percent of its common stock up for sale on the New York Stock Exchange, raising almost a billion dollars. The stock soared—briefly giving VMware a market capitalization approaching that of its parent, EMC.

It was a remarkable first decade. “The entire company would have stepped in front of a bullet” for Greene, Jacques says.

Alas, that wasn’t enough to offset rising antipathy between Greene and EMC’s CEO, Joe Tucci. According to a New York Times report at the time, Greene “believed Mr. Tucci did not understand VMware’s business or her contributions, and he viewed her as too demanding.” The two were also reportedly at loggerheads over Greene’s desire to spin out VMware completely.

At the same time, VMware had begun to miss earnings targets; its stock price had plunged; and some 30 to 40 percent of corporate data centers were already virtualized, leading people inside and outside the company to ask how much room was left for growth. Says Jacques: “There was a big question among customers, investors, and employees around: are we a one-trick pony? Is there more to VMware than just virtualization?”

Greene was let go in July 2008. Paul Maritz, a former top executive at Microsoft whose personal information management startup, Pi, had just been acquired by EMC, was appointed to replace her.

The key question, as Maritz stepped up to the plate, was what the company should do next. Maritz approached the question as if he were a venture investor, Jacques says. “He went out and said, ‘I can see some trends in the industry. I am going to make a range of bets, some of which will pay off, some of which won’t.’ He brought in some very experienced execs to gain a level of operational discipline that we didn’t have before. And at the same time he made a series of acquisitions that in many ways gave us an option on the state of the world.”

Key acquisitions included SpringSource, a provider of tools for enterprise Java software development; GemStone, a specialist in managing distributed data; DynamicOps, which makes tools for automating private computing clouds; and Nicira, a leader in network virtualization software.

Many of Maritz’s moves were designed to position VMware to respond to the rise of public cloud computing. Amazon had introduced its Elastic Compute Cloud, which allows users to rent virtual machines on Amazon’s infrastructure, and S3, its online file storage service, in 2006. San Antonio, TX-based Rackspace began offering similar services the same year. In this new era, any developer with a credit card could line up processing and storage capacity on demand.

And many were doing just that. Freed of the need to buy their own hardware, thousands of startups were able to experiment with new types of consumer- and business-facing Web and mobile applications. That initiated a wave of innovation that still hasn’t crested—and eventually, bigger companies started to get jealous. They’d been investing in data center virtualization for years, but still found it too complex and difficult to assemble internal computing resources quickly, at the moment they were needed.

Some of those companies began to stray off the reservation. “There have been large-scale customers who have IT people who have decided to branch out and use other services,” says Mike Adams, a group manager at VMware who handles product marketing for the vSphere platform. “They want to see what the public cloud has to offer.”

That posed an obvious threat to VMware’s business, which is built around license revenues for its on-premises software, and the service contracts that go with it. (Last year, 92 percent of the company’s revenue came either from licensing or software maintenance.)

Virtualizing Everything

2012 was another year of transition for VMware, as Maritz handed the reins to Pat Gelsinger. The former Intel executive, who joined EMC in 2009 as chief operating officer for information infrastructure products, is known in the industry for his ability to move organizations from the product brainstorming phase to execution. So if one thrust of the Maritz years was to let a thousand flowers bloom, Gelsinger’s job would be to pick just a few of them.

It was clear that one major theme for VMware under Gelsinger’s leadership would be automating data centers at a level beyond that afforded by traditional virtualization software. Using vSphere, VMware’s core virtualization engine, organizations can create up to 10,000 virtual machines within a single cluster of computers. But big computing jobs also require dedicated storage and network bandwidth—and lining them up manually can still be a slow, complex process.

When you rent resources at an Amazon or a Rackspace, somebody else handles all of that, which is why developers like public clouds so much. The ideal alternative would be a private cloud—a set of computing, storage, and networking resources that’s entirely on-premises but still scales up and down on demand, automatically. But that wasn’t exactly what VMware was offering with vSphere.

Even before Gelsinger’s arrival, the cloud question was convulsing the company, says Jacques. “The big questions that came from our customers and channel partners were, ‘You guys have great technology, but how are you different? Is having a private cloud the same as virtualization, or is it completely different? How are you going to win?’ That encouraged tremendous debate and discussion within VMware.”

The winning argument in that debate came from two executives: Raghu Raghuram, VMware’s executive vice president of cloud infrastructure and management, and Steve Herrod, its former chief technology officer. (Herrod has since left VMware to become a managing director at venture firm General Catalyst Partners.) The problem, as they saw it, was clear-cut: corporate IT departments are still too yoked to their hardware. Even the simplest change requires fiddling with servers and provisioning networks. And that was a challenge the company thought it should be able to address, given its expertise in manipulating physical resources through software.

Raghuram and Herrod described their solution as the “software-defined data center.” The idea was to virtualize everything that hadn’t already been virtualized, including networking, storage, load balancers, and firewalls. In keynote talks at several big computing conferences in 2012, Herrod talked about the company’s belief that every data center service would eventually be abstracted and pooled on standard hardware, allowing a new degree of automation.

But VMware didn’t own all the pieces it needed to realize this vision. That’s one of the reasons it went after companies like DynamicOps and Nicira. A bidding war over five-year-old Nicira, perceived as the leader in software-defined networking, drove the price up to a stunning $1.2 billion. It was, perhaps, a fair price, given that “you need to do for the entire data center—computing, networking, and storage—what VMware originally did for the computing part,” in the words of Bruce Davie, a former Cisco and Nicira employee who is now principal engineer in VMware’s networking and security business unit.

When Gelsinger took over in September 2012, he knew he wanted to narrow down VMware’s focus areas to a handful; in the end, it would be just three. Maritz, Ragharam, and Herrod all counseled him to make the software-defined data center one of them.

The other two: the hybrid cloud, and end user computing, which encompasses a a variety of products in the areas of virtual desktop infrastructure, PC virtualization, and workspace management on mobile devices.

The pursuit of those three projects will define VMware for years to come—and determine whether it can find a solid foothold in a market rife with cloud-computing options. “Pat has given us three priorities, and if it doesn’t fall into one of those, it is not a big deal to Pat, and thus it’s not a big deal for everyone else here,” says Adams.

Blending Private and Public Clouds

So, how does a software-defined data center actually work? Adams says the vision—and the company isn’t quite there yet—is to be able to treat each incoming computing job as if it were stamped with a barcode. Scanning this barcode would automatically configure the needed processors, storage, networking, and security, at the required service level (basically, a measure of priority and responsiveness).

vCloud Suite

VMware's vCloud Suite. (Yes, sometimes software still comes in a box.)

VMware’s vCloud Suite, introduced in late 2012, is a combination of new and existing software products that let companies build their own private clouds. It starts with vSphere, for automatically virtualizing individual servers. Then there’s vCloud Director, which virtualizes an entire data center, and vCloud Networking and Security, which sets up a software-defined networking environment, complete with firewalls. There’s the vCenter Site Recovery Manager, for automating offsite backup and disaster recovery, and vCenter Operations Management, which handles storage, performance monitoring and optimization, analytics, metering and chargebacks, and the like.

And if that isn’t a long enough list of products for you, above everything else sits vCloud Automation Center (from the DynamicOps acquisition), the self-service portal where administrators and developers go to initiate computing jobs, and vFabric Application Director, which remembers which applications need which customized combinations of resources.

The vCloud Suite comes in three editions with increasing amounts of firepower—standard, advanced, and enterprise—and the company charges according to the number of CPUs in a customer’s data center. (The standard suite license will set you back by about $4,995 per CPU, plus a $1,050 yearly support subscription; the enterprise version costs $11,495 per CPU, with a $2,414 support subscription.)

“This is the first go at this,” Adams says. “We will be modifying these products over time to meet the exact definition of the software-defined data center and complete the picture. We have all the pieces; it’s more around aligning some of them, and doing more around storage and the network.”

The second of Gelsinger’s three priorities for VMware is the hybrid cloud—and in a press conference in May, Gelsinger himself unveiled the company’s offering in that area. It’s called vCloud Hybrid Service, and it’s a true public cloud—just one that’s been optimized to share workloads with private clouds running vCloud Suite. Not only does VMware’s public cloud run on vSphere, but the core hypervisor has been engineered to manage virtual machines across the boundaries between private and public clouds.

While VMware executives would probably blanch at the comparison, you can think of vCloud Hybrid Service as VMware’s version of Amazon EC2. The difference is that it’s guaranteed to run the 90 operating systems and 3,700 applications that are already certified to work with vSphere, so VMware customers can seamlessly transfer jobs running in their own data centers into the cloud.

VMware doesn’t expect the same kinds of startups who use EC2 to tap into vCloud Hybrid Service. It’s designed for enterprise users who have been yearning to try public clouds—and may even have moved some test applications to Amazon or other services—but who haven’t been able to take the plunge, since public clouds often don’t support legacy enterprise applications.

“The challenge for our customers is that they are not like startups,” says Mathew Lodge, VMware’s vice president of cloud services. “There are any number of companies that can get you to the cloud tomorrow, as long as you forget about everything you currently have. That is the challenge we have decided to tackle. We are a bridge—a blend of what you have today in your existing data center, plus the public cloud.”

The perfect customer for vCloud Hybrid Service, Lodge says, might be a big media company that manages all of its digital content—say, streaming TV shows and movies—from its corporate data center. The company might want to move some of its operations, such as marketing campaigns, to public cloud servers, since they’re fundamentally more flexible. “The cloud automatically scales based on demand, so you never need to do forecasting again,” Lodge says. “But typically, [marketing] has to interact with a customer database sitting in the data center. In that scenario, customers are like, ‘How do I network these things together?’ That is a great example of a hybrid cloud use case.”

To run the new hybrid cloud services business unit, Gelsinger recruited Bill Fathers, the former president of Savvis, which offers colocation and managed hosting services to 2,500 business and government clients from a network of 50 data centers around the world. Fathers has brought to the company’s cloud division “an operational discipline that we haven’t had in the past,” in Jacques’s words.

To some extent, vCloud Hybrid Service is a case of “If you can’t beat ‘em, join ‘em.” VMware knows many of its customers would defect to public clouds if they could. “Ultimately, where this is going is, you are going to say, ‘I have a workload. Where is the cheapest place to run it? Public, private, hybrid?’” Adams says. By offering its own cloud service, VMware can keep these customers in the family, whatever their final choice.

But it’s also a good business play—not as good as software licensing, perhaps, but almost, Lodge says. “Because your cost of goods is almost zero for software, the gross profit is huge—-there is no better business than that,” he says. “But this [the hybrid cloud] is still a good business for us, because we get much greater share-of-wallet than we do with software alone. A customer that is licensing vSphere from us might be buying some networking gear from someone else. This way, we will be renting them the server, storage, network, and everything else.”

Solving Bigger Problems

If public clouds were true utilities, like the electrical grid, it might be game over for VMware. It would almost always be cheaper for enterprises to rent computing power than to build giant data centers, then hire the administrators and license the software needed to run them. But they’re not—most applications have to be tailored to run on public clouds, and others won’t work at all, or have privacy and security requirements that preclude putting them in the cloud. And that, for the moment, has left a window of growth open for VMware.

The company’s challenge now, as ever, is to keep finding ways to help customers get more out of the expensive hardware they’ve already bought. “We are doing to networking and storage what we did to the x86 servers,” says Mahesh Kumar, VMware’s director of enterprise management marketing. “We did not come out and say, ‘You don’t need x86 servers.’ We said, ‘We know you have an existing investment, and we will make it that much more economical to use.’”

That means, in part, making a private data center look and act as much like a cloud service as possible. In the software-defined data center, “every aspect of the data center that needs to be managed and provisioned is now managed by a piece of software rather than a human,” says Davie, the former Nicira engineer. The big win, he says, is not that companies can consolidate more computing into a single data center and a single network—they could already do that. Rather, he says, it’s that “you can change the provisioning model to one that is more automated.”

The vCloud Automation Center portion of vCloud Suite lets customers send parts of their computing workload to public clouds such as Amazon Web Services and Windows Azure, providing a sort of release valve for companies who want to experiment. But with vCloud Hybrid Service, the company is providing a unified environment that’s free of compatibility hassles, and hoping companies will stay in-house.

Meanwhile, VMware in the Gelsinger era is becoming more streamlined. Sales staff and channel partners are being trained to sell all the parts of the vCloud Suite as a bundle, rather than having to go back to customers over and over. Pieces of the company that weren’t related to software-defined data centers, hybrid clouds, or end user computing areas are being spun off. After Maritz stepped down at VMware, for example, he moved to Pivotal, which is building an enterprise-friendly cloud application development platform, using pieces from VMware’s Cloud Foundry business and Maritz’s SpringSource and GemStone acquisitions. (Pivotal is a joint venture between EMC and VMware, with General Electric as part owner.)

As Greene’s tenure was ending back in 2008, the big question at VMware was: what comes after virtual machines? Now that question has an answer. “Eventually we’ll get to the point where every x86 server is 100 percent virtualized,” says Lodge. “Our customers want us to help them solve bigger problems, and cloud is one of those.”

But it will all come down to execution, which happens to be Gelsinger’s specialty. “We are one of the very few companies that is well positioned to take advantage of the cloud,” says Adams, the vSphere group manager. “We have the major pieces. It’s just a matter of bringing them together in the right way, and doing the right thing for the customer at the right time. That is the key challenge that keeps us coming to work on a daily basis.”

Wade Roush is a freelance science and technology journalist and the producer and host of the podcast Soonish. Follow @soonishpodcast

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One response to “After Virtualization: VMware’s Valiant Plan to Co-opt the Cloud”

  1. ward says:

    Those market share statistics for the virtualization market seem dubious at best (60% VMWare, 25% HyperV); the various open source virtualization solutions are not represented in those stats.