VMware reported its quarter, and while the company beat expectations overall, the report still raises several questions and doesn’t answer some of the bigger holdovers. I’ve been talking about the “Novell effect” in prior blogs, and it’s obvious that VMware faces the risk of simply saturating its market. While there are exits from that risk point, it’s neither clear that they’d sustain growth nor that VMware is capable of driving the good outcomes.
Over the last couple of years, VMware’s growth has come increasingly as a result of large deals with enterprises and governments—what the company and the Street call “ELAs” or enterprise license agreements. The shift toward revenue derived from megadeals has made VMware’s revenue more lumpy, which means that a small shift in timing can have a big impact on the quarter. However, you also have to consider the old adage that the problem with selling to the Fortune 500 is that there are only 500 of them. Targeting big companies inevitably results in your running out of buyers, and so the Street is always looking for signs of that saturation softness. The ELA lumps can look like those signs, so everyone’s skittish.
The company doesn’t do itself any favors. The issues associated with ELA lumps must have been known but was only just articulated, making it seem like management was holding back or that the current story is just “spin” they came up with. On the flip side, though, the Street doesn’t understand the real issues and so is looking for the wrong problems downstream.
Virtualization is a tool to help companies utilize hardware better, and it’s valuable because the power of new servers continues to grow while the needs of applications are growing slower. Historically, users tended to put many applications on dedicated boxes because a server was needed to run a given application, but as server power grew there was a desire to “consolidate” servers. The important points here are 1) that virtualization is simply a mechanism for sharing servers between applications that weren’t designed to share nice, and 2) that consolidation eventually has to run its course.
VMware, like other companies (Novell comes to mind) has addressed the inevitable by expanding its scope to include networking, storage, and so forth. Novell added directory management and other things to file/printer sharing; same principle. The problem of course is that the more complicated your offering is the longer your selling cycle is and the more difficult it is to prove to buyers that the incremental gains from upgrading are worth the cost. The longer and more consolidative the sales cycle, the more the revenue per deal needed to justify the effort, and eventually you get mega-ELAs and lumps.
The cloud, which the Street is perpetually worried about, is less a risk to VMware than a potential path of escape. The notion that the public cloud would replace or retard virtualization growth isn’t complete myth, but it’s certainly exaggerated. The megadeals that VMware now does are with companies whose internal economies of scale are simply too good to make public cloud services a slam dunk financially. Yes, cloud consideration could further complicate sales cycles, but it’s not a killer. Private cloud, meaning the addition of additional application agility tools, could help VMware by adding a feature that most buyers think is valuable. Yet VMware is rarely seen as a cloud leader, and in no small part because they’ve avoided being a big public cloud player.
On the call, VMware’s CEO Pat Gelsinger talked about “fluid IT” which is not an unreasonable way of describing where we’re headed or what’s needed in the way of server platform tools. However, what he’s describing is really at the minimum an argument for cloudbursting and at the other extreme a world where applications are built to be more directly coupled to workers’ activity and thus more agile. In either case, you can argue that this is a story about the cloud, DevOps and MANO, and eventually a whole new collaborative/empowerment model for workers. That could be a nice story.
But VMware doesn’t tell it. They have treated the cloud defensively almost from the first, and have allowed open-source tools like OpenStack to steal the thunder of the cloud in both the public cloud space and among cloud planners in those big enterprises VMware covets. They have been laggards in DevOps, simply supporting it and not trying to drive it, and they’ve been almost non sequiturs in NFV, an activity that could well be producing (perhaps by accident) the orchestration model for applications in the future.
Any multi-tasking operating system lets applications share hardware. Linux containers offer enough isolation of applications to suffice in single-tenant clouds like the private clouds that VMware users are contemplating. You don’t need to have platform uniformity to cloudburst if you’ve designed everything right. There is no natural need to have rigid hardware virtualization continuing to expand into the future unless you believe that the issues of server efficiency justify a band-aid and never drive changes to application design to render the issues moot.
The Street is right that VMware faces major risks, and right to think that management is groping more than driving the bus here. They’re wrong thinking that public cloud is the threat; public cloud is yet another mechanism to address utilization issues and challenges for smaller companies in sustaining required IT skills in-house. What VMware has to do isn’t defend itself against cloud, but use cloud evolution to expand its own opportunity. And even there, it will have to look increasingly to the tools that make it possible to build and deploy agile apps and not to the simple platforms that they run on.
Nobody thought that LAN operating systems like Novell’s Netware could ever run out of steam, and yet it should have been clear from the first that if networked-resource features like file and printer sharing were valuable to users, OS providers would simply include them. That’s the risk now for VMware; they could become the lemonade stand sitting at the roadside near where a new mega-restaurant is being built. Being a one-stop shop can’t become being a one-product shop.