VMware Puts Target On Cisco's Back

| About: VMware, Inc. (VMW)
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The relative demise of Hewlett-Packard (NYSE:HPQ) and Dell (DELL) is often blamed on the rise of Apple (NASDAQ:AAPL) and what I call the "device era."

But it's as much a product of VMware (NYSE:VMW) as it is of anything else. Virtualization drives down server costs in two ways, first by reducing the number of servers you need, second by letting commodity servers be used in place of more expensive gear.

At its annual VMworld event this week, outgoing CEO Paul Maritz made that plain. VMware has spent the last decade building the "software-defined data center," and with the recent purchase of Nicira it now begins work on the "software-defined network."

This puts a big bullseye on the back of Cisco (NASDAQ:CSCO), and other companies in the networking space, like HP's 3Com unit. The company's new Nicira unit aims to define networks through software so companies can save on more-expensive networking gear, Cisco's bread and butter.

Enterprise buyers used to buy processing units, data storage units and networking units in order to run the company's applications. The VMware vision is you just buy a bunch of boxes, just enough hardware to do the job, and let software do the rest.

As to the open source threat in all this, Wired described Maritz' answer to that. He said it was a relative handful of talented engineers, let go by the labs of Digital Equipment, Xerox and AT&T at the start of the decade, who were able to build the innovations VMware and Google (NASDAQ:GOOG) brought to the market in the last decade. That's why Maritz paid so much for Nicira - not so much to get the code but the loyalty of the people behind the code.

Maritz is moving to parent EMC (EMC) where the shoe will be on the other foot. Red Hat (NYSE:RHT) recently bought a small company called Glusters which defines network storage through software, under an open source license. This may represent the same threat to EMC that VMware offers to Cisco, because if software defines storage, why buy expensive network storage devices from EMC?

Going forward, ZDNet said incoming CEO Pat Gelsinger, an Intel (NASDAQ:INTC) veteran (Maritz was previously at Microsoft (NASDAQ:MSFT)) will add operational discipline to the company, which should show up in accelerating bottom line growth, not just top line growth.

For top-line growth, Gelsinger said the company will look to Asia, especially China, which has until now been reluctant to buy virtualization. He said the company will be taking a top-down approach, automating the largest companies and government agencies before going after the rest of the market.

If VMware can do that without losing control of its intellectual property, it will be a neat trick.

But VMware has already pulled off some neat ones.

Disclosure: I am long GOOG, AAPL, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.