Growing Competition For VMware In Virtualization Market

| About: VMware, Inc. (VMW)
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Over the years, VMware (NYSE:VMW) has established itself as a market leader in virtualization and has recently shifted its focus to cloud computing services as well. VMware’s vSphere Hypervisor, which provides a virtual operating platform to guest operating systems, increasingly faces competition across the industry. In this article, we take a look at the vSphere Hypervisor’s main competitors and how each of them could affect VMware’s hold over the market. VMware has a share of around 55% in the virtualization market, which has been constantly declining over the last few years and we expect the trend to continue.

Microsoft Hyper-V

The architecture of virtualization software is such that it “sits on top of the hardware beneath the operating system,” which in turn reduces dependence on the operating system which is running. VMware’s presence in this segment made Microsoft (NASDAQ:MSFT) feel the need to enter into the virtualization market and to eliminate the threat VMware posed to its core product, the Windows OS. Consequently, Microsoft launched Hyper-V back in 2008 to compete with VMware. Since its launch, the Hyper-V has constantly improved and added more features to compete with market leader VMware. Between the two, there are a number of varied features and flexible configurations that vSphere offers which the Hyper-V doesn’t as it has only one edition. Notably, the Hyper-V is much cheaper than the full vSphere Enterprise Edition, but not all clients buy the full enterprise edition. Additionally, the advantage for customers already using other Microsoft products such as System Center have an added incentive because Microsoft provides Hyper-V virtualization at no cost to them. In addition, due to the general improvement in the product and services offered, Microsoft has gained market share. VMware's market share has gone from 65% in 2008 to 57% in 2013. Comparatively, Microsoft’s share in the market has gone up from around 20% at the end of 2008 to 28% in 2013. Microsoft’s Hyper-V is VMware’s biggest area of concern in the next few quarters.

Citrix XenServer

Citrix’s (NASDAQ: CTXS) XenServer, which is different from Microsoft’s Hyper-V, is a bare-metal hypervisor. This means it runs directly on the host hardware and doesn’t need an operating system to be hosted on. With the recent release of XenServer 6.2, Citrix believes it is in shape to give serious competition to VMware. The most significant feature of the XenServer is that it has no licensing charges. It is freely available, with the company charging customers only for support and maintenance. Even though Citrix’s market share in the segment dropped from around 4% in 2011 to 3.3% in 2012, a lot of customers, including a number of small and medium businesses (SMBs), are likely to switch to the XenServer going forward.

Other Competitors

VMware also has several other competitors, the most prominent being Oracle’s (NASDAQ:ORCL) VirtualBox, which is also a freely available virtualization hypervisor. It supports a variety of operating systems such as Microsoft Windows, Linux, Mac OS and Solaris, which makes it a very flexible platform. The only downside to this product (from a commercial standpoint) is that it specifically targets advanced users – those who can edit code for customized usage. It is also slightly slower in terms of performance and likely doesn’t pose an immediate or a significant threat to VMware’s market share.

Next on the list is the Red Hat Enterprise Virtualization Hypervisor (REVH), which uses the Linux kernel as a hypervisor with virtual machines having direct access to the hardware resources. It is available both in the bare-metal form and as a hosted platform. The key distinguishing factor of REVH relative to other hypervisors is that it allows user to provision virtual machines themselves, again an option for advanced users.

Due to an increase in competitors over the last few years, VMware has seen a decline in market share. Going forward we expect the share to drop even further. If Microsoft’s Hyper-V causes a greater decline in VMware’s share than we currently forecast, there could be a significant downside to our $94 price estimate for VMware.

In terms of the virtualization market, competition is a major concern for VMware as Citrix’s XenServer and Microsoft’s Hyper-V could be big winners in the upcoming few quarters. Additionally, VMware has shifted focus towards cloud computing and intends to use its huge virtualization enterprise customer base to utilize its enterprise-level hypervisor for cloud computing, the ESX. With the hybrid cloud market expected to grow significantly over the next few years, things are looking bright for VMware on the back of its recently launched hybrid cloud services. However, in terms of virtualization, it certainly is not a one-horse race anymore.

Disclosure: No positions.