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Microsoft's Way Out

If Microsoft and XenSource/Citrix can get their acts together, they should have viable competitors to VMware in two years. That gives VMware 24 months to keep charging outrageous prices for its core ESX Server - aka Infrastructure 3 - software. Once that party ends and the main hypervisor goes to free as Microsoft and XenSource want, VMware will need to replace a whole lot of revenue fast. It will require its desktop, management and other emerging plays - a deal with Dell around a virtual server appliance, for example - to pay off well.

Microsoft has tried to slow VMware as much as possible until it can reach Competency Point. As mentioned, it gives Virtual Server away. In addition, customers tell us that Microsoft is still a tremendous pain about not supporting Windows running on top of VMware. And, lastly, Microsoft has forged close ties with XenSource and given the company early, open access to Viridian.

None of this seems to have bothered VMware much - what with revenue doubling every year.

But, in two years time, Microsoft may look far more formidable. It will be the only major virtualization player able to create the tightest possible links between its operating system, the hypervisor and management packages. (Okay, okay. Sun can do this with Solaris.) This should lead to a major performance edge over rivals, according to our sources.

In addition, Microsoft will see its own efforts complemented by Citrix and XenSource, while VMware must fight for itself.

Industry watchers have long thought VMware's ability to double revenue every year impossible, and the company has proven them wrong. But the window for maintaining that growth will indeed start closing at speed even with an expanding overall server virtualization market. (Some investors may be able to swallow, say, 50 per cent growth, if they really try.)

So, live it up while you can, VMware investors. Keep up the Paralytic Buy.

Just know that Microsoft won't be impotent for that much longer. I think . . . ®

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