VMware, a young Silicon Valley company, is the early leader in a fast-growing market for what is called virtual-machine software. And that puts it on a collision course with Microsoft, the industry’s Goliath.
A virtual machine essentially mimics a computer so that several copies of an operating system — say, Windows or Linux or both — can run on one physical machine. It allows computing chores to be done on fewer computers, using less electricity and taking up less space, promising a way to control costs at corporate data centers straining to keep up with the ever-increasing demands of the Internet age.
It is also a product that occupies strategic ground in computing, as a layer of code that resides between a computer’s hardware and the operating system, usurping some tasks, and potentially undermining the importance of the operating system.
In a meeting with corporate customers in New York last month, Steven A. Ballmer, Microsoft’s chief executive, said, “Everybody in the operating system business wants to be the guy on the bottom,” the software that controls the hardware. And he vowed that Microsoft, whose Windows operating systems are the main source of its corporate wealth and market power, would “compete very aggressively with VMware.”
When quizzed on Microsoft’s plans, Mr. Ballmer replied, “Our view is that virtualization is something that should be built into the operating system.”
Bundling new technology into Windows has long been the Microsoft game plan. The most storied case came a decade ago when Microsoft overcame the challenge posed by another Silicon Valley highflier, Netscape, offering another crucial layer of software, the Internet browser. Microsoft feared a competitor’s Web browser, running on top of the operating system, could reduce the power of Windows.
“There are certainly some analogies here to what Microsoft did with Netscape,” said Mendel Rosenblum, a founder of VMware and its chief scientist.
The tactics Microsoft used in the browser battle, of course, led to a host of antitrust troubles for the big software maker in the United States and Europe.
This time, in the market for virtual-machine software, Microsoft is more restrained. Bowing to customer requests, Microsoft began more than a year ago to change its software licenses so its products could run in virtual machines like VMware offerings.
But in recent months, according to VMware, Microsoft has introduced new restrictions on how Microsoft products can be used in virtual machines in new ways, beyond simply dividing a single physical computer into several virtual ones.
This next wave of virtual technology, analysts say, includes software that lets virtual machines move freely across many physical machines, juggling computing chores, so that applications do not crash and Web response times are faster. Another promising new ability is running desktop personal computers as virtual-machine software, hosted and managed securely from a data center.
VMware, however, points to license changes on Microsoft software that it says limit the ability to move virtual-machine software around data centers to automate the management of computing work. A white paper detailing VMware’s concerns will be posted Monday on its Web site (www.vmware.com), the company said.
“Microsoft is looking for any way it can to gain the upper hand,” said Diane Greene, the president of VMware.
Yet VMware is making no antitrust claims against Microsoft, and legal experts question whether the friction between the companies is anything more than two rivals taking different paths to an emerging market.
“This seems to be a far more subtle, informed and polished form of competitive aggression than we’ve seen from Microsoft in the past,” said Andrew I. Gavil, a law professor at Howard University. “And Microsoft has no obligation to facilitate a competitor.”
In the past, said Mike Neil, general manager of virtualization strategy at Microsoft, customers paid a license fee when Windows was installed on a physical machine. But he said virtual-machine software breaks the tight link between the operating system and the hardware, raising the possibility that customers could be using Windows more but not paying for it. So now, he said, the license fee is based on when a copy of Windows is used, whether in a virtual or physical machine.
The license changes, Mr. Neil added, were not designed as a competitive tool. And he sees no evidence of any anticompetitive impact. “Look at VMware’s financial success and you have to ask, How disadvantaged are they really?” he observed.
VMware is certainly thriving these days. Its sales reached $709 million in 2006, nearly double the previous year’s figure. In the fourth quarter, revenue was $232 million, growing 100 percent from the year-earlier quarter.
VMware was founded in 1998 by Mr. Rosenblum, an operating-systems expert and an associate professor at Stanford University; Ms. Greene, a veteran of Silicon Graphics, Tandem, Sybase and a couple of start-ups, who is also Mr. Rosenblum’s wife; and three other computer scientists, Scott Devine, Edouard Bugnion and Edward Wang.
Virtual-machine software dates to the 1960s, when I.B.M. used the technology to coax greater performance from costly mainframes. The achievement of Mr. Rosenblum and his team of Stanford-trained researchers was to develop virtual-machine software that worked, fast and reliably, on today’s lower-cost machines powered by microchips made by Intel and Advanced Micro Devices.
By late 2003, VMware was profitable and growing strongly, and its payroll was approaching 400 people. Its future would depend on keeping its talented team of computer scientists in place, and Google and others were dangling offers. So VMware agreed to sell itself for $635 million in cash to EMC, a leader in data storage systems that was expanding into software. VMware had talked to other companies including I.B.M. and Microsoft. But EMC, not being a major software company, offered VMware more independence.
This month, EMC said it would give VMware an added measure of independence with a separate stock listing and its own shares to help retain its current work force of more than 2,500, and lure new talent. EMC will sell 10 percent of VMware in an initial public offering in the summer that analysts say is likely to value the company at 10 times what EMC paid for it just three years ago.
VMware’s growth is explained by the experience of customers like the International Truck and Engine Corporation, a producer of diesel engines, trucks and school buses. A few years ago, Barry Naber, a technology manager at International Truck, the operating company of Navistar International, began looking for ways to curb the growth of server computers in its data center.
Mr. Naber opted for VMware virtual-machine software, and today the company runs 230 applications, including expense, accounting, training and Web programs on 18 computers in its computer center in suburban Chicago. He estimates the savings for each virtual machine at $7,500 in hardware and maintenance costs avoided, or about $1.7 million.
Mr. Naber also looked at Microsoft’s virtualization offering, but in tests found it was far slower and less reliable than VMware. “We’re entrenched with VMware for now,” he said.
One thing that Microsoft has lacked is a hypervisor, the lowest level of software that rests on the hardware and partitions the computer so it can cleanly and efficiently run several virtual machines. Microsoft is developing a Windows hypervisor code-named Viridian. It will be tailored for the next version of the Windows server operating system, called Longhorn, scheduled to ship by the end of 2007. Viridian will be ready shortly after that. “Virtualization, frankly, is a feature,” Mr. Neil, the Microsoft manager, said. “It’s a great operating system feature.”
Microsoft has built up its virtual-machine team in the last few years with internal hiring and a couple of small acquisitions. And having identified virtual software technology as a core ingredient to its operating system, Microsoft promises to become a daunting competitor eventually.
Yet today, VMware holds an estimated 80 percent of the market for virtual-machine software that runs on computers powered by industry-standard Intel and A.M.D. microprocessors. “The market could change depending on what Microsoft does down the road, but VMware is the 800-pound gorilla of virtualization,” said John Humphreys, an analyst at IDC, a research firm.
In the long term, VMware will also face competition from start-ups in the virtual-machine software market like Virtual Iron and XenSource. The start-ups note that only 5 to 7 percent of computers in data centers use virtual software. They see a market that is just beginning to take off with plenty of opportunity, if they can match VMware’s technology and charge less.
Virtual Iron and XenSource take opposing views on Microsoft’s recent moves. “Microsoft sees VMware coming between them and their customers,” said John Thibault, president of Virtual Iron. “So Microsoft is manipulating its license terms to see if it can freeze the market and slow down the trend.”
For its part, XenSource signed a deal last year with Microsoft to collaborate so that XenSource’s software will work well with the virtualization technology Microsoft is developing for the Windows Longhorn server. “We set out to partner with Microsoft,” said Peter Levine, president of XenSource, “and VMware chose to compete with Microsoft.”
VMware, according to Microsoft, should see the wisdom of the path XenSource chose. In his meeting with corporate customers recently, Mr. Ballmer sketched out a future in which Microsoft would put fundamental virtual-machine software in its operating systems, and “VMware builds on top.”
VMware is leery of such an accommodation, fearing it would prove to be a one-sided bargain. “We will not sign agreements that give Microsoft control of this layer,” Ms. Greene said.
