EMC Corp. Cashing in On VMware Just As Competition Heats Up

Includes: DVMT, MSFT
by: William Trent, CFA
The bulls have been out in force on EMC Corp. (EMC) due to the strong contribution VMware has been making to earnings, and to the decision to sell a portion of VMware in an IPO.

Virtualization is hot because it allows companies to do more with less, and those types of investments are about the only thing companies will loosen up the purse strings for. But with EMC now getting the opportunity to give up a tiny slice of VMware while recouping most if not all of its initial investment, I was particularly sensitive to an article at Infomationweek about potential new competitive threats.

XenSource’s XenEnterprise Is A Virtualization Bargain (Informationweek):

Virtualization will inevitably shrink the bite hardware takes out of our capital budgets. But VMware has somewhat dampened IT’s enthusiasm by charging $3,000 per socket for its enterprise-class VMware ESX. Doesn’t, say, $750 per perpetual dual-socket license sound a lot better? At that price, XenSource’s XenEnterprise 3.2 is an easy-to-install bargain that takes advantage of the open source Xen 3.04 hypervisor. For many organizations itching to get going with virtualization, XenEnterprise will serve nicely thanks to its solid performance and general ease of use. The current version has some drawbacks: For one, it doesn’t yet support 64-bit Windows, but XenEnterprise 4.0 will and it’s heading into beta now, with an expected mid-August production date.

Adding to market pressure, Microsoft (NASDAQ:MSFT), another latecomer to the virtual machine party, will include a sufficiently robust virtualization offering as part of its new server operating system. In what has to be good news for XenSource, the big guns in Redmond have preannounced formal support and integration for Xen-based VMs as part of the next server build, to optimize Windows Server 2008 to run on Xen and to let XenVMs run on Server 2008. XenSource is partnering with Microsoft to optimize Win/Xen and Xen/Win performance.

Ain’t competition grand?

Grand indeed, for consumers. But the potential buyers in the IPO may want to question whether it will be equally grand for them.

EMC 1-yr chart:

EMC 1-yr chart