VMware's (NYSE:VMW) recent hybrid cloud announcement was both expected and yet provocative. It falls into a pattern of successful moves made in virtualization security and networking as the company grows its addressable market by virtualizing servers and delivering increased IT agility, efficiency and economy.
In 2009, I talked about how VMware, through acquisitions and engineering, entered the security space despite a robust virtualization security ecosystem (see VMware Crosses the Rubicon - March 2009). VMware was threatened then by the new security challenges being brought into the production data center by virtualization and the inability of its partners to move fast enough to address them.
There were both technology and business case issues to the virtualization ecosystem challenge in those days. VMware responded to the tepid ecosystem progress at least in part by buying (my alma mater) Blue Lane Technologies for its firewall and advanced intrusion prevention capabilities. Many of those capabilities became the core of VMware's security offerings.
Today VMware is caught between success in the private cloud (server virtualization) and the rapid rise of public cloud leader Amazon (NASDAQ:AMZN) along with the high profile entry of Microsoft Azure (NASDAQ:MSFT) into the hybrid cloud space. Today enterprises can see three different cloud visions from three very powerful and capable companies.
If I were to summarize where the three clouds are today I would say that the public cloud is where the buzz is; the private cloud is where the enterprise money is; and the hybrid cloud is where the future is.
Hybrid cloud is the natural extension of the private cloud. It is an operating model whereby enterprises can get the benefits of the public cloud (primarily agility and scalability) with the control of the private cloud (primarily security). This has been discussed previously (and more extensively) at Seeking Alpha (see Hybrid is a Whole New Cloud).
In short, the public cloud has not attracted material enterprise spend, because of control and security issues, while the virtualization-driven private cloud has had its own set of issues, including virtualization vendor lock-in.
As mentioned before in hybrid cloud, the hybrid cloud market (TAM) could be sizable, perhaps as high as $60B (based on hybrid cloud software running on 30M servers to be shipped over the next three years and a comparable $2k/server unit price and a three year refresh rate), compared to VMware's existing $50B total addressable market. Amazon's estimated public cloud revenues are estimated to be under $3B for 2012 (see Amazons Cloud Revenues Examined).
There has been plenty of discussion about VMware versus Amazon, so I would like to explore the context of some other highly relevant battles.
As hybrid cloud emerged on the scene it presented both a threat and an opportunity to VMware. It is the natural evolution of server virtualization; indeed, hybrid cloud could be thought of as cloud virtualization. At the same time Microsoft's installed base, combined with its new Azure cloud offering creates an even more promising opening for the Redmond powerhouse than its first major battle with VMware over server virtualization.
A true hybrid cloud operating model is the seamless integration of both public and private clouds for both existing and new enterprise apps, without requiring server virtualization. With that definition in mind it is easy to understand why Microsoft could be very interested in the rapid evolution of hybrid cloud while VMware might have a more tentative stance.
Microsoft could use the hybrid cloud to decouple VMware from its strong position in server virtualization, by embracing the seamless hybrid cloud along with its Azure offering. Think cloud virtualization without requiring server virtualization. In some respects, VMware has no choice but to embrace hybrid cloud and cloud virtualization, and position itself as a potential competitor to even its most strategic partners.
Many VMware service provider partners are building their own hybrid clouds as a complementary offering to the VMware private cloud. Until now it was a clear win/win for both. Yet that proposition has now become muddled. Some of those partners (who have followed VMware over the years) have no doubt noted how VMware's hybrid cloud move is very similar to VMware's first moves within the virtualization security ecosystem, in which VMware moved aggressively with new products that competed directly with some security ecosystem members. Still others likely have enjoyed many years of robust cooperation.
Hardware and Software Players
In addition, you can expect a new generation of hybrid cloud killer apps, reshaping how software and IT services are delivered. See, for example: The Cloud's Next Killer Apps. Hybrid cloud solutions will likely deliver levels of agility, protection and scale that have been impractical for most organizations in the private and public cloud operating modes.
So as VMware crosses the Rubicon yet again, it promises to keep disrupting tired status quos and perhaps even a few new and vibrant ones. One thing is clear, IT is about to undergo a transformation to more dynamic, elastic and resilient operating models that will likely depend less on dedicated hardware and more on agility, resilience and scale.
VMware has emerged as a world-class disruptor. Looking forward, it certainly has the momentum and the brand to continue to upend established markets. Yet as it grows it runs the risks of upending its own markets and enabling competitive inroads like never before. 2013 and 2014 should turn out to be pivotal years for VMware and at least a dozen well established companies, including Microsoft. Based on my own estimates (mentioned earlier), hybrid cloud could be a potential $30B to $60B market. Much of that spending may come from existing IT categories and one of them could be server virtualization (private cloud).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.