Swot Vmware Cloud Infra

G00250894

SWOT: VMware, Cloud Infrastructure,WorldwidePublished: 21 August 2013

Analyst(s): Michael Warrilow, Matthew Cheung

VMware is at a crossroads. As the Nexus of Forces continues to reshapetechnology markets, VMware is protecting its heritage in virtual infrastructurewhile it invests in hybrid cloud.

Table of Contents

Analysis..................................................................................................................................................2

SWOT Analysis.................................................................................................................................2

Strengths....................................................................................................................................4

Weaknesses............................................................................................................................... 6

Opportunities..............................................................................................................................9

Threats..................................................................................................................................... 14

Recommendations for Partners and/or Competitors.......................................................................18

Implication for VMware................................................................................................................... 19

Company Overview........................................................................................................................ 20

Methodology.................................................................................................................................. 20

Recommended Reading.......................................................................................................................20

List of Tables

Table 1. x86 Forecast Server Virtual OS New Shipments per Year .......................................................12

Table 2. Summary of Key Data for Respondents.................................................................................. 20

List of Figures

Figure 1. Graphical Representation of SWOT: VMware Cloud Infrastructure, Worldwide.........................3

Figure 2. SWOT, VMware Cloud Infrastructure, Worldwide..................................................................... 4

Figure 3. Main Vendor x86 Server Virtualization Infrastructure.................................................................6

Figure 4. Main Vendor for x86 Virtualization by Region..........................................................................13

Figure 5. Primary and Secondary Vendors for x86 Server Virtualization.................................................15

AnalysisThis document was revised on 23 August 2013. For more information, see the Corrections page ongartner.com.

SWOT Analysis

This strength, weakness, opportunity and threat (SWOT) analysis explores the strengths,weaknesses, opportunities and threats for VMware globally. At the strategic level, VMware hasidentified three growth priorities:

■ Software-defined data center

■ Hybrid cloud

■ End-user computing

This document is related to the first two priorities (rather than end-user computing). Morespecifically, this document explores the vSphere, vCloud and vCenter product lines.

For the areas being explored in this document, VMware's products offer x86 server virtualizationinfrastructure — often referred to by VMware as cloud infrastructure — as well as software toadminister and manage such environments. In broad terms, virtualization is defined by Gartner asthe process of decoupling layers of IT functions so that the configurations of the layers depend lesson each other.

Founded in 1998, VMware experienced a meteoric rise over the course of its first decade as itestablished and then dominated the market for x86 server virtualization. Now, as the companycontinues to evolve from virtualization to cloud — while also encountering the forces of social,mobile and information — it faces greater competition than ever before. VMware continues to strainunder the dual pressure of addressing and satisfying the needs of its increasingly important higher-end enterprise customers while maintaining its traditional, transaction-oriented volume businesswith its indirect, channel-driven approach. Adding to this challenge, VMware is extending outwardto directly offer cloud services through its recently launched hybrid cloud service and creating newquestions in the minds of its partner base.

Figure 1 shows the strengths, weaknesses, opportunities and threats pertaining to VMware's cloudinfrastructure, based on Gartner's SWOT rating model.

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Figure 1. Graphical Representation of SWOT: VMware Cloud Infrastructure, Worldwide

S W

O T

Source: Gartner (August 2013)

In its second decade, several of the issues that VMware was able to address in its early days arenow returning to challenge its growth. VMware's virtualization products enjoyed early success inimproving agility and efficiency in test/development environments, yet public cloud andinfrastructure as a service (IaaS) are increasingly pressuring VMware in these same environments.Figure 2 summarizes the individual SWOT findings.

Gartner, Inc. | G00250894 Page 3 of 23

Figure 2. SWOT, VMware Cloud Infrastructure, Worldwide

Strengths Weaknesses

• Solid corporate position

• Strong core product family

• Reputable corporate brand

• Perception of high price

• Insufficient diversity in product portfolio

• Dependence on third-party application stacks

• Weakening long-term growth

Opportunities Threats

• Upselling the installed base

• New leadership

• New investment (hybrid cloud services)

• New vision for the data center

• New (emerging) markets

• Public cloud

• Microsoft

• Open source

• Major infrastructure vendors


Strengths

Solid Corporate Position

VMware boasts a range of positive corporate statistics, including a customer base of more than500,000 organizations globally. Gartner's vendor rating for VMware's financial position was StrongPositive and Positive on both strategy and marketing (see "Vendor Rating: VMware"). VMware'sbalance sheet for cash and short-term investments at end of 2Q13 showed $5.3 billion, up $386million over the previous quarter.

Starting in 2011, VMware began investing in customer advocacy programs and it maintains positivecustomer satisfaction overall (as measured by its Net Promoter Score). VMware continues to investin innovation, through its own R&D as well as through acquisition. Recent acquisitions, such asDynamicOps and Wanova, have strengthened VMware's management and end-user computingportfolio while Nicira is paving a path for future leadership in the emerging network virtualizationmarket.

While the current position is positive overall, Gartner's cautions in regard to VMware can besummarized as follows:

■ The business model depends on vSphere revenue expanding and investing in adjacent markets.

■ The ability to maintain high-revenue growth in a more product- and price-competitive marketafter the majority of workloads have been virtualized.

These items are explored elsewhere in this document.

Finally, with the appointment of CEO Pat Gelsinger in 2012, VMware has refocused on its traditionalstrengths to broaden revenue growth opportunities. Gelsinger's extensive leadership experience


from EMC and Intel provide him the perspective to help VMware adjust course. It will also continueto result in internal disruption for the immediate term as illustrated by the recent departure of anumber of key leaders. Within Gelsinger's first six months, VMware had reduced employee headcount by more than 8% globally and divested acquisitions not in line with VMware's current focus(for example, SlideRocket, Zimbra and Shavlik).

Strong Core Product Family

vSphere is at the heart of VMware's success and is a robust solution that has also created anecosystem of server, storage and network alliance partners. It has been recognized in the industryas a market-leading product. Gartner's latest Magic Quadrant for server virtualization infrastructureagain lists VMware in the Leaders quadrant ("Magic Quadrant for x86 Server VirtualizationInfrastructure"). While the gap between VMware and its competitors has reduced in recent years,due to increasing competitive functionality, vSphere continues to record higher overall ratings for itsvision and ability to execute, and maintains its functionality lead in virtualization, with the August2012 introduction of vSphere 5.1. It includes:

■ Enhancements in vSphere Distributed Switch (including network virtualization and software-defined networking via the Nicira acquisition)

■ Support for single-root input/output virtualization (SR-IOV)

■ vMotion without shared storage configurations

■ New capabilities including vSphere Data Protection, vSphere Replication and vSphere StorageDRS

This comes on top of the new high-availability architecture and increased scalability introduced withvSphere 5.0 some 13 months earlier, which demonstrates the rapid innovation that vSphere hasbecome known for. Among the most commonly used features of vSphere are Distributed ResourceScheduling, High Availability, PowerCLI, Storage vMotion and vNetwork Distributed Switch.

The vSphere product line, previously known as ESX, is the primary revenue driver for VMware. It isthe main vendor for 79% of organizations globally, according to Gartner research conducted inJune 2013 (n = 329). Moreover, Gartner research shows 98% of organizations use VMwarevirtualization in some capacity. By comparison, VMware's closest competitor, in terms of usage, isMicrosoft Hyper-V. As at the time of writing, it is used by less than 25% of organizations.

Such accomplishments are rare in the IT market, where few vendors are afforded the position ofbeing the seemingly unassailable leader over such an extended period. VMware's rise toprominence resulted from product innovation, broad industry alliances and a simple-yet-compellingbusiness case combined with product reliability.


Figure 3. Main Vendor x86 Server Virtualization Infrastructure

Microsoft (Hyper-V)11%

VMware (vSphere/ESX/ESXi)

79%

Xen, 1%KVM, 1%Other, 2%

Unsure, 6%Prefer not to answer

0%

Question: What is your organization's main vendor for x86 server virtualization?Note: Data is based on Gartner research conducted in June and July 2013.


Reputable Corporate Brand

During the last decade VMware has established itself as a premium on-premises infrastructuresoftware "stack" for the enterprise. It maintains high customer satisfaction overall and is considereda reliable, enterprise-grade software product. As such, VMware vSphere can be considered the"luxury brand" in x86 server virtualization infrastructure. While this remains a strong positive (today)it may also become a (future) risk. In the cloud era, the propensity for organizations to afford — orbe willing to pay — a premium will be increasingly challenged. The same is also true for price-sensitive late adopters of x86 server virtualization infrastructure and/or within emerging economies(including Brazil, China and India).

Weaknesses

Perception of High Price

Vocal responses to the licensing changes introduced with vSphere 5.0 in 2011 were well-highlighted in the media, and are frequently mentioned in discussions with Gartner clients. WhileVMware's rapid response to immediate feedback reduced the volume level, the public and privateresponses were evidence of an underlying sentiment that VMware prices were too high. In 2012,


VMware ultimately revoked the licensing change — much to the relief of customers. Overall, anddue largely to the strength and market leadership of vSphere, VMware management appearsoblivious to customer perception of high pricing.

During the past year, an increasing number of Gartner clients have been asking about competitorsto VMware, notably Microsoft, but also Oracle. This, to a certain degree, is a function of concernsabout VMware pricing and an early warning sign that VMware's market position will come underincreased pressure.

VMware's brand value will be diluted if an alternative provider(s)can deliver a sufficiently managed cloud infrastructure service,using proprietary and/or selected open-source components,rather than premium equivalents.

This would in turn present VMware with the risk of margin erosion through increased pressure onpremium pricing and licensing. Where migration from VMware to cloud can to be sustained in asatisfactory manner, it will also materially impact existing maintenance revenue from existingcustomers (unless a VMware cloud solution is chosen).

Put simply, the perception of VMware's is not immune from market forces and the potential risk ofcultivating a premium price (and/or brand) cannot be overlooked in an increasingly penetratedmarket. However, Gartner continues to see few actual customer conversions from VMware at thistime and a proportion of such discussion must be considered as a negotiation tactic.

Insufficient Diversity in Product Portfolio

VMware's product revenue remains dominated by vSphere. In fact, purchasing of unbundledvSphere accounted for almost 70% of license bookings in 1Q13 and remains the sales engine forVMware. With increasing levels of virtualization, VMware's core market appears increasinglypenetrated and risks becoming saturated in the medium term. VMware leadership is undoubtedlyaware of this and is taking steps to address the situation — most notably in end-user computing,management, hybrid cloud and network virtualization. However, several attempts to diversify haveproven to be less than successful — both within the current areas of strategic focus (Shavlik, EMCIonix, B-Hive) as well as in areas where VMware may have expanded (Zimbra, SpringSource,GemStone).

As an illustration of VMware's current position, end-user computing license bookings are nowapproximately 10% of total license bookings while management automation and the vCloud Suiteaccounted for around 20% of license bookings. These changes have occurred during the last 24months. Further, VMware recently launched the VMware Hybrid Cloud Service, which is available inthe U.S. currently and will expand to other geographies through 2014 (see New Investments inOpportunities section below).


Dependence on Third-Party Application Stacks

VMware's strength has traditionally been in the virtualization layer. In early 2013, most of the vFabricfamily of application infrastructure technologies was moved to a stand-alone business, known asPivotal and run by former VMware CEO Paul Maritz (see "EMC and VMware Form Pivotal toChallenge Software Megavendors in the Cloud"). As a result, the contrast between VMware'sportfolio and that of its larger competitors could be considered a weakness (particularly for thosewanting a "one-stop shop").

Both Microsoft and Oracle provide OS, database andmiddleware software in addition to their virtualization offerings.VMware does not.

In addition, Oracle and Microsoft recently strengthened their partnership in cloud, offering supportand licensing that allows greater flexibility in use of Oracle software on Windows Azure — a movethat clearly aims to highlight VMware's position. Microsoft has emphasized its application-centricapproach to manage not only infrastructure but also applications in the cloud.

VMware does not directly offer OS, middleware or application software. However, it does maintain abroad ecosystem of certified third-party software providers and boasts more than 3,600applications being supported. It has also moved to establish partnerships for its vCloud HybridService (vCHS) — including SAP and Tibco.

VMware's application independence may equally allow it to beconsidered a more flexible solution, particularly inheterogeneous enterprise environments.

In all cases, the option to select a VMware-only solution stops at the virtualization layer and as suchdoes not include OS, middleware and/or application software. For this reason VMware's positionhas to be considered weaker relative to rivals Microsoft and Oracle as they are able to offer a morecomplete solution to potential customers.

Weakening Long-Term Growth

Owing to Gartner's view on VMware's exposure, to slightly faster-than-expected growth in keysegments, VMware is positioned to beat 2013 consensus revenue expectations. Looking furtherahead, revenue analysis indicates that without sufficient ROI in its new opportunities VMware mayunderperform Wall Street consensus revenue expectations beginning in 2014 and worsen thereafter(see "Gartner Invest Revenue Analysis: VMware").

In this eventuality, the ability for VMware to control its direction will be reduced. Increased pressureon VMware's revenue growth from its traditional business would result in greater scrutiny from


shareholders, executives and customers alike, resulting in future obstacles to investment andinnovation.

To minimize the likelihood of this eventuality, Gartner believes VMware needs to rapidly develop itsopportunities — particularly in cloud — as it takes full advantage of its current strengths whileworking to minimize the weaknesses listed in this document.

Opportunities

Upselling the Installed Base

VMware boasts a large customer base including 99% of the Fortune 1000. Almost all customers useits server virtualization infrastructure software, but a significant proportion (more than 50%) is yet toexpand its usage to other VMware software beyond basic administration using vCenter Server. Thisundoubtedly represents an immediately addressable market opportunity for VMware — albeit withits own challenges (see "Market Trends: Virtualization Management Will Remain Depressed in 2013and Beyond").

Since 2011, VMware has moved to bundle more of its software so as to increase its wallet share.More recently, and most notably, the launch of integrated software suites have aimed to achievethis goal. For its high-volume, channel-driven business, VMware offers advanced operationalmanagement by bundling and/or upgrading vSphere with vCenter Operations Manager — in amanner that is intended to be simple to purchase and implement. This is known as vSphere withOperations Management (vSOM).

For enterprise environments demanding broader cloud management capabilities, the vCloud Suiteincludes the premium edition of its core software (vSphere Enterprise+) along with cloudfunctionality (vCloud Director, vCloud Networking and Security) plus other software dependent onthe chosen edition. In addition, enterprise license agreements (ELA) have already shown early signsof success among VMware's enterprise customers. During VMware's 1Q13 earnings call, COO CarlEschenbach stated that the majority of vCloud Suite bookings to date were part of EnterpriseLicense Agreements (ELAs) (approximately 75%). This style of purchasing exemplifies theincreasing importance of enterprise customers to VMware. In fact, Eschenbach also noted that justfewer than 30% of all VMware bookings were from ELAs. Relative to the same period of 2012, thiswas a significant increase (almost 50%). Put simply, upselling represents a tangible opportunity toVMware, one that it is actively working to leverage.

New Investment (Hybrid Cloud Services)

Having formed the Hybrid Cloud Services business unit under the leadership of Bill Fathers,VMware officially launched vCHS in May 2013. While no official dates are yet available forgeographies other than the U.S., we expect further data centers in select global locations (namely,Western Europe and Asia/Pacific) through at least 2014. This represents a strategic investment forVMware, requiring new skills and capabilities, one that will be a key indicator of VMware's ability togrow through diversification. It will also place VMware in direct competition with Amazon Web


Services (AWS), Windows Azure and all other cloud infrastructure players. In broad terms, VMwareestimates the hybrid cloud opportunity as being $14 billion by 2016. In contrast, Gartner forecaststhe IaaS market as being $24.3 billion by that time (see "Forecast: Public Cloud Services,Worldwide, 2011-2017, 2Q13 Update").

VMware claims vCHS is an attractive business for them to invest in, one that is not simply aboutprotecting its vSphere business by providing a viable alternative to other IaaS providers. For itsexisting customers, VMware believes vCHS will allow it to maintain a business relationship andtechnology investment in VMware and its partners.

Success in vCHS will require balance as well as focus, and will not be without considerable risk.Service providers and system integrators remain interested in creating easy onramps to the cloudfor VMware-based customers, but competitive visions of interoperability, commoditization andvendor lock-in have kept many service providers from expanding their VMware footprints. At thesame time, there has previously been confusion among partners over VMware's move to the cloud— particularly in the period prior to the launch of vCHS. The concept of channel-friendly routes tomarket for vCHS (see Note 1) will likely address this concern by offering a method for reseller/system integrator partners to gain revenue from (VMware) cloud without having to outlay capital tobuild and deliver their own cloud infrastructure and keeping them relevant in the cloud era whenthey otherwise might not be. Rather than focusing on the "plumbing," VMware partners can look tooffer value-added services instead.

While we believe VMware will successfully address current channel confusion before the end of2013, through sales training and enablement, it does create another potential distraction withinVMware's volume sales business at the same time that it is under increasing attack from Microsoft.Beyond 2015, partner success (or failure) with vCHS — and cloud more generally —will increasinglyinfluence the direction of VMware's partner business. We also note that the time frame for rollout ofvCHS to other markets is not currently specified. In all cases, and all key markets, it will lag AWSand Microsoft. Along with the capital intensive build-out of vCHS, successfully enabling the channelto sell VMware's cloud services will be critical to establishing new growth opportunity in the periodthrough 2016.

New Vision for the Data Center

VMware has undoubtedly helped to fuel interest in software-defined technologies, not the least ofwhich is due to the acquisition of Nicira on 23 July 2012. At more than $1 billion, the acquisitionrepresented a milestone investment for VMware, one that aims to enable software-definednetworking (SDN) (see "Ending the Confusion About Software-Defined Networking: A Taxonomy").This ambitious move has its risks, not least of which is creating a new market to recoup the largeinvestment, but it has helped VMware to advance its position of thought leadership. This is knownas the software-defined data center.

Many of the inherent concepts within its software-defined vision were predated by a broaderVMware vision of the data center of the future. It comprised pools of virtualized infrastructure thatcould be programmed so as to enable management and automation. In fact, the principles of asoftware-defined infrastructure stack are manifest through the recent history of the vSphereplatform (Distributed Resource Scheduler [DRS], Distributed Power Management [DPM], host


profiles). This has continued beyond the considerable success achieved at the virtual computelayer. VMware expanded into the storage layer through products such as the vSphere StorageAppliance, for smaller environments, storage vMotion and in ongoing R&D expected to becomegenerally available in the 2013 and 2014 time frame. For integration with technology partners, thevStorage API set now includes vStorage API for Storage Awareness (VASA) and vSphere API forArray Integration (VAAI), helping to push storage-related tasks onto the storage array so as toimprove performance of the compute layer by freeing up resources for other more dynamic tasks.Following this, virtualized networking represents the next technology horizon for VMware, one whichis intended to enable its vision of the hybrid cloud as well as to create greater efficiency and speedin the on-premises data center.

Finally, Gartner notes that VMware's strategy reflects the origins of the customer journey — insidethe enterprise data center. As VMware invests in areas such as vCHS, it is almost invariably in thecontext of such experience. The challenge for VMware will be to ensure that it does not limit thefuture opportunities coming from public cloud while it maximizes its advantage in movingenterprises to private and/or hybrid cloud.

New (Emerging) Markets

Through at least 2015, North America will continue to represent the largest share of VMware's corebusiness (server virtualization). Europe's proportion of server virtualization will continue to decline(more specifically, the percentage of Gartner's total forecast virtual OS instances). Western Europewill continue to dwarf Eastern Europe, in total, but both are expected to increase by a similaramount during the period. However, emerging markets in Eastern Europe, Latin America and Asiahold the growth opportunity for VMware in its core products.

When viewed in combination, Asia/Pacific and Japan representthe greatest opportunity in terms of forecast growth in virtualOS.

This is highlighted in Table 2.


Table 1. x86 Forecast Server Virtual OS New Shipments per Year

Region 2013 2015 Shipments Delta CAGR (%) 2013-2015

Middle East and Africa 304,603 628,464 323,861 44

Eastern Europe 371,879 760,946 389,067 43

Western Europe 7,638,092 8,018,534 380,442 2

Latin America 470,699 872,561 401,862 36

North America 13,868,269 18,868,476 5,000,207 17

Asia/Pacific and Japan 3,676,864 10,124,592 6,447,728 66

Note: Data is based on Gartner research first published in May 2013.


Respondents to Gartner research show China has significant expectations of increases during2013. Japan is also expected to increase significantly, from a relatively small base, having beentraditionally dominated by Unix and mainframe for critical workloads (and, hence, generally slowerto adopt virtualization). Similarly, Western Europe can expect to be eclipsed by both Eastern Europeand Latin America in terms of new virtual OS shipments.

Finally, the preference for VMware as the main vendor can be seen to vary by geographic region.Lower preference is seen outside North America, including the two regions with greatest expectedincrease in virtual OS instances through 2015 — namely, Latin America and Asia/Pacific. Theseregions also have lower levels of virtualization than Europe or North America, hence cementing theirpotential importance.


Figure 4. Main Vendor for x86 Virtualization by Region

80

58

80

74

0

10

20

30

40

50

60

70

80

90

100

North America Latin America EMEA Asia/Pacific

Percent

Unsure

All other

Prefer not to answer

VMware (vSphere/ESX/ESXi)

Microsoft (Hyper-V)

Median virtualization

Note: Data is based on Gartner research conducted in June and July 2013.


Similar to the variance by geographic region, Gartner research also shows the preference forVMware is lower among small and midsize organizations. We also note interest from earlyvirtualization adopters in regard to older servers that are approaching the end of depreciation cyclesand where virtualization requirements have not changed significantly. For these environments wenote interest from Gartner clients in exploring alternative vendors, including Microsoft and Red Hat.

For VMware to maximize these opportunities in emerging markets, it will need to explore new salesand marketing strategies rather than rely on past approaches that have not served theseopportunities as well as larger organizations in North America and Europe. We note that this issomething VMware has begun to do, conscious of being faced with greater competitive pressures,from more directions, than it ever has before. To succeed may require VMware to invest indeveloping additional, distinct brand identities although that is something that VMware haspreviously had difficulty in achieving (VMware Go).


Threats

Public Cloud

Of all the current threats to VMware, public cloud may be the most clear and present danger. Morespecifically, enterprise adoption of public cloud infrastructure as a service (IaaS) for test anddevelopment, front-end Web traffic and disaster recovery represents an immediate threat tovSphere license revenue globally — unless/until VMware can claim a substantial stake in thismarket.

VMware's licensing program for service providers is showing high growth (100% in the last 12months) but it comes from a low starting point. It also compares to Gartner's analysis of the totalIaaS market size of $6.3 billion for 2012, with a high rate of growth (35.4% CAGR for 2013 through2017). These represent the key financial drivers for VMware to enter the cloud IaaS market directly,and despite the more than 180 service provider vCloud partners participating globally.

While AWS is the dominant market share leader in public cloud IaaS today, it is not perfect. As atJanuary 2013, AWS meets 71% of Gartner's required criteria for production-grade enterprise publiccloud IaaS providers. In fact, and with some irony, it is AWS that is succeeding in areas whereVMware had previously offered an advantage — namely, test/development environments. In doingso, AWS is challenging VMware in a traditional heartland — as may Google. Left unchecked, thereduction in opportunity for VMware may become significant, given the cost and/or effort toredeploy on-premises is nontrivial.

Microsoft

Microsoft now represents a multiheaded threat to VMware. It has worked to establish Hyper-V asthe "good enough" contender to vSphere and that strategy is beginning to bear fruit for Microsoft.Gartner research, conducted in June 2013, showed Microsoft as the primary vendor for x86 servervirtualization infrastructures among 11% of organizations globally. An additional 12.5% usedMicrosoft as their secondary vendor.


Figure 5. Primary and Secondary Vendors for x86 Server Virtualization

11.0

12.5

0

10

20

30

40

50

60

70

80

90

100

Primary vendor Secondary vendor

Percent

All others

Microsoft

Vmware

Note: Data is based on Gartner research conducted in June and July 2013.


While VMware remains the leader in x86 server virtualization infrastructure, Gartner researchundertaken in June 2013 indicates the proportion of organizations running Hyper-V remainssignificantly lower than on VMware vSphere (23% versus 84%, respectively, when combiningprimary and secondary vendors).

What is most noteworthy for both Microsoft and VMware is thatalmost one-quarter of respondents has moved to embraceMicrosoft as a provider for x86 server virtualizationinfrastructures — with more than 10% citing Microsoft as theirprimary vendor.

In general, the proportion adopting Hyper-V as their primary hypervisor is also larger outside NorthAmerica (13% to 15% versus 6%), among small and midsize organizations (16% to 17%), andthose organizations that aggressively adopt new technology (16%). Based on current trends, theproportion of Hyper-V workloads is expected to increase during coming years.


While Hyper-V has helped Microsoft to make inroads into on-premises virtualization in recent years,Microsoft has also worked to adjust the course of its Azure cloud service. Starting in 2008, primarilyin the platform as a service (PaaS) market, Microsoft has moved to include IaaS as the key offeringand has now standardized it on the same version of Hyper-V available in Windows Server 2012 —something that VMware has been doing since the launch of vCloud services. We have seen a smallbut increasing number of organizations begin to explore Windows Azure — in the order of 5%,according to the results of Gartner Research conducted in June 2013 (n = 329). This result wassecond only to AWS, and larger if/when including other Microsoft cloud services aimed at enterpriseinfrastructure (Exchange, SharePoint). Similarly, Microsoft has also continued to expand Azure'sglobal points of presence, thus expanding its market opportunity.

The most recent organizational restructures are illustrative of the shared approach, for WindowsServer and Windows Azure, within the server and tools business unit. Along with the SystemsCenter family these products now possess a shared vision for enterprise cloud known collectivelyas Cloud OS that also aims to enable third-party service providers to offer infrastructure servicesleveraging Windows Server and Windows Azure technologies.

Of particular importance for VMware, an inherent principle ofMicrosoft's Cloud OS vision is innovating in the cloudinfrastructure layer, at greater scale and speed, and thenbringing the successes to its on-premises offerings.

This approach reflects a small but increasing trend where enterprises look to leverage the best ofhyperscale cloud environments inside their on-premises data center(s). As such, it can beconsidered as being from the outside (public cloud) to the inside (on-premises enterprise).

Overall, and to summarize, Microsoft's cloud infrastructure vision now directly competes with two ofVMware's three strategic focuses — namely, software-defined data center and hybrid cloud. Morebroadly, Microsoft also competes with the PaaS offering available from Pivotal (an EMC/VMwarejoint venture). For more information, see "SWOT: Microsoft, Private Cloud Offering, Worldwide."

Open Source

Open source has been a part of the competitive landscape for VMware since the arrival of Xen in2003. The subsequent acquisition of XenSource in 2007, by Citrix, became an early competitivepressure that has largely dissipated (other than in select environments such astelecommunications). In its place, new open-source projects continue to come into being, includingKVM, CloudStack and OpenDaylight, each with varying degrees of enterprise adoption at this time.Most notably, we do observe continuing higher usage of open source among telecommunicationsand service providers — primarily driven by cost containment.

More recently, a new open-source cloud initiative is garnering increased attention and threatens toplace pressure on VMware's cloud efforts — namely, OpenStack — the result of an initial joint effortbetween Rackspace and NASA. The OpenStack community continues to grow, with membership


now including AT&T, HP and IBM, among many others. As example, Red Hat is betting thatOpenStack will be the "Linux of cloud" and Red Hat will be the "Red Hat of OpenStack" (see"SWOT: Red Hat, OpenStack and Enterprise Virtualization, Worldwide"). Red Hat seeks toincorporate itself into the OpenStack ecosystem and develop opportunities around OpenStackusing its proven business model. Industry players are participating in the project, and may be ableto leverage their existing enterprise relationships to gain market share rapidly in OpenStack-relatedservices, especially once they incorporate OpenStack interoperability into their broader productportfolios. In fact, due in no small part to the acquisition of Nicira, VMware is now also an activeparticipant in the OpenStack community and vSphere has become a supported hypervisor.

OpenStack potentially represents both an opportunity and athreat to VMware.

Senior VMware executives have suggested OpenStack as a platform for organizations wishing to doit yourself while the vCloud Suite represents a more integrated "one-stop shop." In all cases,OpenStack needs to continue to improve its suitability to enterprise needs. Many vendors believe itwill likely take at least another year before mainstream commercial adoption begins, and longerbefore OpenStack generates enough revenue to be significant for them. We also note that whileOpenStack itself is open source, current vendor implementations have included proprietarycomponents. In the context of VMware then, OpenStack is both a midterm opportunity for the newlynamed NSX product as well as a potential distraction for vCloud prospects.

Major Infrastructure Vendors

While VMware's overall vision is synchronized with (large enterprise) interest in cloud computing, itspush into infrastructure virtualization (storage, networking) is confronting established organizationstructures and skills that are resistant to change — making growth harder. It is also providing anincreasing point of friction with established alliance partners, such as Cisco, as well as competitiveoverlap with numerous storage vendors, primarily at the lower end.

Similarly, in the area of virtualization management and/or private cloud, VMware must contend witha range of established enterprise management vendors as well as an increasing number ofemerging players. In effect, competitors can be considered as within three distinct categories.Namely:

■ Virtualization administration, which is dominated by Microsoft and VMware and which has astrong affinity between the infrastructure and administration/management layers.

■ IT Operations Management (ITOM), which is dominated by four management software vendors(BMC Software, CA Technologies, HP and IBM).

■ Niche specialists, which largely comprise a variety of stand-alone/dedicated/pure-playvirtualization management vendors.


The primary factors that all infrastructure vendors — including VMware — must recognize includethe diversity of competitive pressures, ongoing inertia due to existing investments and increasinginterest in cloud management (see "Market Trends: Virtualization Management Will RemainDepressed in 2013 and Beyond").

More recently, the June 2012 announcements by Microsoft and Oracle are illustrative of a desire tomarginalize VMware's future cloud prospects resulting from its lead in x86 server virtualizationinfrastructure. As VMware continues to grow, it is inevitable that it will be increasingly considered acompetitive threat to more players in the infrastructure software market globally.

Recommendations for Partners and/or Competitors

No technology or service provider is immune to the convergence and mutual reinforcement ofsocial, mobility, cloud and information patterns known as the Nexus of Forces (see "The Nexus ofForces: Social, Mobile, Cloud and Information"). This is equally true of VMware, which rose tobecome an enabler of greater flexibility in the modern data center during the last decade. At thehighest levels, cloud and mobility are driving VMware to re-examine and evolve its business model— adding hybrid infrastructure services to its existing software portfolio.

From one perspective, VMware's options are plain and clear: It must invest in its future, governed asare all vendors by the Nexus of Forces, while it protects its core business.

For those who compete against VMware:

■ Differentiate by taking advantage of negative market sentiment in regard to VMware's price,innovating in pricing, licensing and packaging wherever possible. By highlighting areas of value,VMware's product leadership can be moderated.

■ Compare and contrast VMware on the basis of its approach to the software stack inside thevirtual machine (VM), and on its reliance on third parties for OS and application functionality.The lack of product diversity can also be positioned as a long-term viability risk but, in doing so,VMware's inherently heterogeneous nature must be considered — with its broad third-partysoftware ecosystem.

■ Highlight VMware's philosophy of extending the enterprise data center from the inside out, if/where applicable, contrasting with the outside-in approach. IT organizations stand to gaingreater agility where external providers can (more) rapidly provide new capabilities that are ableto be integrated on-premises as/when necessary.

■ Review VMware's position with respect to open-source initiatives and industry/de factostandards as a potential way to highlight customer perception of lock-in.

For ISV and services partners:

■ Explore the applicability of VMware's innovative route to market for cloud, namely, the vCHSchannel model, which provides an avenue to build a cloud-ready business without investingcapital to build globally distributed cloud infrastructure, support and/or services. By findingareas to add differentiable expertise, the partner ecosystem improves viability and adds value tocustomers.


For alliance partners (hardware and software):

■ Develop solutions that can integrate to VMware's cloud services as a way to expand to privateand hybrid cloud usage, starting with lightweight options and incrementally taking advantage ofthe services available through the vCloud API and integration to the vCloud Automation Center(vCAC), building proof points of the integration provided.

Implication for VMware

2013 is a critical year for VMware. Looking to 2014 and beyond, and as mentioned, Gartnerforecasts increasing pressure on VMware's revenue growth from its traditional business. With thatwill come increasing scrutiny from shareholders and customers alike, placing obstacles oninvestment and innovation. To avoid this outcome, VMware must ensure that it repeats the formulafor success that dominated its early years, providing industry-leading innovation and timelyexecution. Momentum around cloud is building, and organizations are starting to make decisions onproviders for public, private and hybrid cloud.

In order to maximize its opportunity for continued growth VMware must:

■ Continue to bundle its products and services in vSphere adjacencies, such as it has done withmanagement and private cloud. In doing so, VMware must remain focused on providing valueand attractive entry points for new prospects in emerging markets (plus those that cannot affordto extend existing virtualization investments). In this area, Microsoft Windows will remain thekey competitor.

■ Explore all avenues to accelerate the availability and viability of vCHS in key markets globally,while simultaneously building immediate opportunity for existing services provided by serviceprovider vCloud partners. In this area, AWS will be the key competitor globally, followed byMicrosoft Windows Azure, Google and global system integrators.

■ Develop scalable, repeatable methods to address similar readiness challenges at the local andregional level by leveraging local VMware resources and joint execution with vCloud Poweredpartners. Through at least 2018 this will include key verticals such as financial services and thepublic sector as each explores private and hybrid cloud.

■ Accelerate sales and marketing investments to optimize growth and territory for traditional,partner-driven vSphere business in emerging markets. This may necessitate the establishmentof a separate VMware brand, with distinct pricing and packaging.

■ Continue to explore opportunities with OpenStack. Provide a way to dissipate negativesentiment in regard to pricing while also maximizing the opportunity for NSX. In doing so, moveto articulate the areas of overlap and difference between software-defined networking and othersoftware-defined concepts (storage, data center).


Company Overview

VMware has 500,000 customers, including 99% of the Fortune 1000 and 94% of the Fortune Global500. It has offices in 47 countries around the globe, including North America, South America,Europe, Asia/Pacific, the Middle East and Africa.

VMware has 55,000 partners globally, including 180 service provider vCloud partners.

2012 revenue was $4.61 billion.

Methodology

The provider analyzed in this SWOT was selected as a leader in x86 server virtualizationinfrastructure. The Gartner Vendor SWOT analysis is designed for the use of providers as well asindividuals in strategic planning, marketing and competitive analysis roles as a supplement to theirplanning processes. Its primary value is as an independent analysis of the provider's competitivesituation. The SWOT analysis provides a unique independent view of the strengths, weaknesses,opportunities and threats for a specific part of a provider's business in a specific market andgeography.

Gartner conducted a Web-based survey in June 2013 exploring the usage of, and plans for,virtualization and cloud technologies. Respondents were drawn from a panel of organizationsknown to Gartner.

Key demographic data is shown in Table 2.

Table 2. Summary of Key Data for Respondents

Respondents by geographic region North America 127, Latin America 20, EMEA 131, Asia/Pacific 47

Respondents by adoption profile Aggressive 44, Mainstream 213, Conservative 72

Company Size(Employees Worldwide)

Small 63 , Medium 115, Large 142

Company Size(Employees in Country)

Small 98, Medium 139, Large 84


Recommended ReadingSome documents may not be available as part of your current Gartner subscription.

"Vendor Rating: VMware"

"SWOT: Microsoft, Private Cloud Offering, Worldwide"


"SWOT: Red Hat, OpenStack and Enterprise Virtualization, Worldwide"

Acronym Key and Glossary Terms

DPM Distributed Power Management

DRS Distributed Resource Scheduler

VAAI vSphere API for Array Integration

VASA vStorage API for Storage Awareness

Evidence

1 VMware does, however, ship SUSE Linux Enterprise Server with each copy of vSphere.

2 See www.vmware.com/partners/programs/isv-center/.

3 See www.gartner.com/document/2307515.

4 Similarly, although not covered in this document, Microsoft also competes in areas related toVMware's other strategic area (end user computing).

5 See www.openstack.org/foundation/companies/.

6 See https://blogs.oracle.com/cloud/entry/oracle_and_microsoft_join_forces and http://blogs.technet.com/b/microsoft_blog/archive/2013/06/24/partners-in-the-enterprise-cloud.aspx.

7 Mobility is directly related to VMware's end-user computing strategy, and is not specificallycovered in this document.

Note 1

The primary route to market for vCloud Hybrid Service is through commercial SKUs, whichrepresent standard packaging of compute, storage, networking and IP address space. These SKUsare sold both direct and through the VMware two-tier distribution channel (both transactionally andthrough enterprise agreements). These SKUs trigger immediate provisioning of accounts to theservice. In VMware’s model, the channel maintains control of the relationship (including billing).Once an account has been provisioned, customers can add capacity to their account via a self-service portal.

In addition, VMware Cloud Credits are a unit of currency that can be sold through the VMwarechannel, enabling customers to maintain control and visibility of cloud spend. VMware CloudCredits allow prepayment and future redemption for cloud services from approved vCloud ServiceProviders as business demand dictates. In the future, VMware also plans to make these creditsredeemable for vCloud Hybrid Service.


http://www.vmware.com/partners/programs/isv-center/

http://www.gartner.com/document/2307515

http://www.openstack.org/foundation/companies/

https://blogs.oracle.com/cloud/entry/oracle_and_microsoft_join_forces

http://blogs.technet.com/b/microsoft_blog/archive/2013/06/24/partners-in-the-enterprise-cloud.aspx

http://blogs.technet.com/b/microsoft_blog/archive/2013/06/24/partners-in-the-enterprise-cloud.aspx

Both routes to market also allow VMware partners to get actively involved with an ongoing cloudservices model.


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