VMware IPO puts virtualisation in the spotlight

VMware's stellar stock offering on 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, virtualisation 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 long-time industry player David Marshall, who authored the book Advanced Server Virtualisation and also writes the VMblog.com, which is not affiliated with the company.

Investors rewarded the company's prowess on Tuesday, sending shares of the stock as high as $55.50 (£27.90) a share, closing at $51, up from $29 a share where the stock was initially priced late on Monday.

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

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

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 virtualisation. 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.

Microsoft has faced some challenges on its road to virtualisation. 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 five percent of servers are virtualised 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 virtualisation business. By integrating virtualisation 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 virtualised.

And though it still represents only a fraction of the market, virtualisation 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."

The shift to virtualisation has caused some turmoil for the rest of the software industry, however, which has traditionally priced its products based on the number of servers, or in some cases, the number of server processors, that are running the code. Some interim pricing moves have largely addressed the current situations, but fundamentally, Haff said, software pricing will have to change more as virtualisation takes hold.

"I expect that we are going to tend to see more software being licensed per-employee or per-use or metrics that are really much more tied towards the value that software is delivering as measured directly," Haff said.

One company that has clearly profited from the shift is storage giant EMC, which paid about $600m (£301m) for VMware in 2004. The company sold just a 10 percent stake in the company this week, but raised roughly $900m, with the total market capitalisation of the company now hovering north of $10bn.

"It turns out EMC really got a pretty good bargain there, even though, at the time, people thought it was an awful lot of money," Haff said.

Virtualisation is not the only technology looking for Wall Street cash these days. About 100 companies have filed for stock offerings and are expected to go public sometime this year, including a number of technology companies, said Richard Peterson, director of capital markets research for Thomson Financial.

One technology company that has garnered some attention is NetSuite, an on-demand software applications company backed by Oracle's Larry Ellison. The company hopes to raise $75m, based on its IPO registration filing fee with the Securities and Exchange Commission (SEC). Computer-monitor maker ViewSonic has also lined up at the IPO gate, aiming to raise $143.8m with its offering, according to its registration filing fee with the SEC which it filed last month.

But they will have a tough act to catch the imagination of investors the way VMware has done. And that is largely because virtualisation is so widely seen as the future of the corporate data centre.

"I don't see it as a flash in the pan," author and blogger Marshall said.

Marshall heads business development and marketing for InovaWave, a privately held company that has a software product designed to speed up virtualisation and allow a single server to host more virtual machines than would otherwise be possible by improving input/output tasks, such as writing to disk.

Marshall sees a growing market that opens up significant opportunities for companies that can find a niche. But that doesn't mean that Microsoft and others that want to target VMware's market will have an easy go of it.

"They got almost a billion dollars from that IPO," Marshall said. "Part of that money is going to be used to acquire new technology and hire engineers."

CNET News.com's Dawn Kawamoto contributed to this report.

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