VMWare Update: Two Rough Quarters

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VMWare, is best known as a market leader in virtualization software, a type of software that simulates hardware for the purpose of separating a computer’s operating system from its hardware. For the consumer this allows one computer to run multiple operating systems, like Apple computers running Windows. For enterprise users, virtualization lets them run multiple virtual servers off of one physical server. However the software maker cannot seem to catch a break.

Research by IDC, and first reported by ComputerWorld, shows that VMWare’s market share of the enterprise X86 virtualization market fell from a reported 51% during 2007 to 44% during the third quarter of 2008. At the same time Microsoft’sHyper-V virtualization product has already had a material impact on Microsoft’s market share, even though the product was only released three months ago, as Microsoft’s market share jumped to 23% during the third quarter, up from 18% in the first quarter of 2008.

VMWare has not only lost a significant amount of market share in dramatic fashion, but also has lost a significant quantity of senior talent and share holder value. According to Reuters and the New York Times, since September 1st, VMWare has lost Richard Sarwal, their Executive Vice President for Research and Development, Mendel Rosenblum, a Co-Founder and their Chief Scientist, and Paul Chan, their VP for Product Development. As of the market’s close on Friday VMWare was trading at $20.69 per share, less than a sixth of its 52-Week high of $125.25 per share, and having lost more than 75% of its share price year to date. This comes after a tumultuous summer which saw VMWare’s founding CEO, Diane Greene, forced out by the board of its parent company, EMC, resulting in VMWare shares losing 25% of their value in one day.http://charts.wikinvest.com/WikiChartMini.swf

Given the current economic climate, VMWare should be doing better than ever. With the growth of Apple’s Intel based computer platform people are using VMWare’s Fusionsoftware, and its competitor Parallels Desktop, to boot Windows on Apple hardware. But more importantly in the current economic downturn, one way that organizations will squeeze more computing power out of existing hardware is to spend budgets on virtualization software rather than on new servers. This is because virtualization lets enterprises deploy multiple virtual computers on a single set of hardware while simultaneously maximizing hardware utilization and consolidating resources. This is why virtualization was ranked one of the top ten strategic technologies to watch in 2009 according to Gartner. As further evidence of the growth in the virtualization market, IDC noted that virtualization shipments increased a staggering 53% between the second quarter of 2007 and the second quarter of 2008. With enterprise grade products like VMWare Server and VMWare ESXi, the company seemed well positioned to make the most of the current economic situation.

The introduction of Hyper-V, which is priced extremely competitively, in combination with senior management turn over and slumping share prices has caused VMWare to be downgraded by at least three different investment houses (1, 2, & 3) in the past month. This combination of factors seems to be the perfect storm to disrupt VMWare from being able to take advantage of the opportunities which the current economic duress could have afforded it. Lets hope for the sake of their employees and their shareholders that they can get it together.

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