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Can VMware boost profits by expanding from data centers to clouds?

Gelsinger & Co. think so – and thus Virtzilla is born

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Analysis Big cloudy startups build their infrastructure on custom – or, at the very least, cheap – iron, and they use open source software because they like to – and often need to – tweak the systems software to make their workloads hum. And that's a problem for VMware.

And it's a big problem, one that makes the company irrelevant except to enterprise customers who have by and large chosen its server virtualization technologies for their data centers and who have not yet decided what to do about all this cloud noise.

If companies decide to be more like Google, Facebook, and Amazon – which is by no means a foregone conclusion – they will do a radical change in the way applications are developed and deployed.

And incidentally, in that world the new Pivotal spinoff from VMware and EMC, which was detailed by the two companies on Wednesday at a meeting with Wall Street analysts in New York, will perhaps be a lot more relevant than VMware, so VMware had better hope and pray and sacrifice whatever chickens it can find that companies do not want to be like hyperscale web operators, and that they just want to virtualize their servers, storage, and networks and automate the operation of them, largely on plain-old x86 rack servers.

Because in that world, VMware still has a place, and one that it can expand from a fairly modest addressable market of maybe $6bn to what VMware CEO Pat Gelsinger explained to Wall Street would be a $50bn market by 2016 according to VMware's prognosticators.

As Gelsinger explained, the server virtualization racket is doing just fine, with a total addressable market (TAM) of $6bn and a compound annual growth rate of 10 per cent per year over 2012 through 2016, by VMware and EMC estimates. This is a pretty good business, and one that is growing considerably better than the actual physical server biz, which most industry analysts expect to go flat over the same period in terms of revenue and see modest shipment increases if all goes well.

All may not go well as virtualization software improves and vendors cram more and more cores into a CPU socket. The desire for more computing capacity among the elite hyperscale cloud operators who might account for 25 per cent of server shipments has to grow a lot faster than the relatively more modest needs of enterprise data centers for the overall server racket to grow.

VMware's total addressable market will expand to $50bn by 2016, says CEO Pat Gelsinger

VMware's total addressable market will expand to $50bn by 2016, says CEO Pat Gelsinger

At some point, virtualization (which lets a server run multiple workloads interleaved on the same system) and cloud computing (which interleaves computing across multiple divisions or groups within a company on private clouds and across companies in public clouds) work against the Moore's Law advancements. Server makers want to sell more boxes at given price points, which is where there margins lie, but chip makers want to sell just enough more computing per per chip to catch the interest of buyers, but not so much that it grossly impacts volumes and therefore unit costs.

There is a lot of tension in here among users, server makers, and Intel and AMD and their non-x86 competitors.

Small wonder that Gelsigner said this week in an interview with The Wall Street Journal that he doesn't want to be the next CEO at Intel. It's going to be a lot tougher to run a chip business than to run VMware.

Unless, of course, you believe that VMware's attempts to virtualize networking and storage turn out to be incredibly more difficult than the virtualization juggernaut believes. The server-virtualization wave was done with server makers, despite the fact that it went against some of their own interests (selling more boxes regardless of the ridiculously low efficiency of compute on the boxes). It's hard to imagine that network vendors are just going to roll over and let VMware own software-defined networking – but thus far, Cisco Systems, Juniper Networks, HP, and IBM show no such interest.

VMware, with its Horizon tools, has put a big stake in the ground to virtualize and stream end-user computing in many different ways from the data center, and Gelsinger believes that the TAM for end-user computing will be $8bn and grow at a 20 per cent or higher growth rate compounded between 2012 and 2016.

The software-defined data center – or SDDC as VMware likes to call it – consists of all of the vCloud orchestration tools that ride on top of the ESXi hypervisor and plug into the vCenter Server management console to turn it into a cloud plus the underlying compute virtualization. This aggregate SDDC market is growing at around 20 per cent per year or higher, by estimates cooked up by VMware, and will have a market size of about $28bn by 2016. That implies that the management and orchestration extensions in the vCloud stack that VMware has developed and will develop over the next few years will have a growth rate on the order of around 25 per cent.

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