August 14, 2007 1:33 PM PDT

VMware surge puts virtualization in the spotlight

VMware surge puts virtualization in the spotlight
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VMware's stellar stock offering Tuesday shows that virtual machines are starting to add up to real dollars.

Virtual machines, the technology that VMware helped pioneer, allow one computer to act as many, whether it's a Mac running Windows and the Mac operating system at the same time or a massive server running multiple instances of Windows and Linux simultaneously. Once a niche technology, virtualization is expanding rapidly as businesses try to get more bang for their server buck.

And VMware has made itself nearly synonymous with the technology.

"It's almost like Xerox or Kleenex," said longtime industry player David Marshall, who authored the book Advanced Server Virtualization and also writes the VMblog.com, which is not affiliated with the company.

Investors rewarded the company's prowess Tuesday, sending shares of the stock as high as $55.50 a share, closing at $51, up from $29 a share where the stock was initially priced late Monday.

"It further validates not just what VMware is doing, but the entire virtualization space," Marshall said.

Although VMware is the clear leader in the market, it is far from the only company eyeing virtualization.

Both open-source rivals and commercial software makers see a chance to win business customers by offering similar features to VMware, but at a far lower price.

"Virtual Iron is starting to make a name for itself, as is XenSource," Marshall said, noting that the rivals are currently selling their products for about a fifth of what VMware charges.

And the biggest name in software is also betting big on virtualization. Microsoft entered the space several years ago, with its 2003 purchase of Connectix. More recently, it has shifted much of its work to a new type of virtual machine, known as a hypervisor, that it is building into Windows Server. The technology, code-named Viridian, is set to debut as an add-on to Windows Server 2008 and is due within 180 days of the release of the new Server operating system.

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Microsoft has faced some challenges on its road to virtualization. The company recently had to pull several capabilities from Viridian, including a live migration feature, to keep the product on schedule.

But it's still in its early days, Microsoft insists.

"Given that less than 5 percent of servers are virtualized today, we believe it's still a very nascent segment of the market with lots of growth potential," said Larry Orecklin, a general manager in Microsoft's System Center and virtualization business. By integrating virtualization into its server operating system and into its existing lineup of management tools, Microsoft is hoping to make it more palatable to the masses.

Customers aren't waiting for Microsoft, though. Marshall said that about a quarter of new servers are being virtualized.

And though it still represents only a fraction of the market, virtualization is already shaking up the technology industry. It's changing the way servers are built, with chipmakers like Intel building support into their chips. And it's changing the way software makers are pricing their products.

"I do expect it will have an effect on what servers look like, what types of configurations people buy," said Illuminata analyst Gordon Haff. "I don't think it's really all that clear today exactly how that's going to play out in detail."

What is clear, he said, is that companies are no longer focused on just how much raw computing power they can get.

"We're kind of at this point right now where we have tons of hardware horsepower throughput, etc. and we are being much more limited by the ability of people to manage and use things," Haff said. "People really are willing to give up some of the underlying raw efficiency of hardware in return for something that, as a practical matter, users and operators can use in a more efficient way."

CONTINUED: Upsetting old price structures…
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