Bloomberg News

Microsoft Takes on VMware With Almost-Canceled Cloud Program

January 19, 2012

Jan. 17 (Bloomberg) -- Microsoft Corp.’s computer-network- management software, a product that Chief Executive Officer Steve Ballmer once came close to scrapping, emerges today as the cornerstone of a bid to challenge VMware Inc.

A new version of System Center 2012 will be released as part of its final testing phase, said Brad Anderson, a vice president in Microsoft’s management and security division. The software is used with Windows and virtualization software, letting companies turn their servers into so-called private clouds. The offering is cheaper than VMware’s competing product and has equivalent features, Anderson said.

Companies use cloud computing to store and run programs via the Internet. While the approach spares them from having to store data locally, many businesses want to run them in-house for better control; hence, the appeal of private clouds. Though VMware has an edge in this area, Microsoft should pose a stronger challenge this year, said Al Gillen, an analyst at Framingham, Massachusetts-based research firm IDC.

“The stage is being set for a very brutal competition between Microsoft and VMware,” he said. “You are going to see a lot of focus around price. Until now, VMware’s functionality has been so much better that they haven’t had to compete on price. That’s going to change.”

One of the goals of cloud computing is to give customers access to a pool of computing power and storage that can easily be assigned to a particular program, without the need for information-technology staff.

Public and Private

Companies like Microsoft and Amazon.com Inc. that run public clouds use their own data centers to store and operate programs for customers. In a private cloud, the client wants the same flexibility, cost savings and ease of use in their own data centers. While that requires virtualization software to combine multiple programs on one server, it also relies on network- management software like System Center, Anderson said.

Cloud has been a key factor in the rising importance of Microsoft’s management software. When Anderson joined the company in 2003 from Novell Inc., he said the product, then called Systems Management Server, was largely used to help companies roll out programs and security patches to workers.

Development was running more than two years late and unbeknownst to Anderson at the time, Ballmer had told the leadership team that if the schedule slipped again, he would cancel the product. After a few weeks at Microsoft, Anderson sat in his first meeting with Chairman Bill Gates, who asked him why the company needed it at all.

Billion-Dollar Sales

At the time, Microsoft got about $250 million in annual sales from management software, Anderson said. Two years ago, the business broke the $1 billion mark, he said. Anderson declined to provide more recent revenue numbers. VMware, based in Palo Alto, California, doesn’t break out revenue for its equivalent business line.

Even with the growth, Redmond, Washington-based Microsoft hasn’t been able to compete on a par with VMware, Anderson said. Four years ago, at meetings with customers at a Microsoft conference in Barcelona, Spain, that message was clear, he said.

“I came away feeling we have a lot of work to do,” he said. “That even though their price was 5X ours, we didn’t have the capabilities to even have that conversation.”

In recent years, with improvements to the management tools, as well as Windows Server and Microsoft’s Hyper-V virtualization software, that’s starting to change. After the debut of the last test version today, the final System Center 2012 will be released in the first half of the year.

Unilever, Lufthansa

Microsoft, the world’s software maker, largest counts Unilever NV among its private-cloud customers, Anderson said.

VMware still has an advantage because of its leading role in virtualization software, which gives more flexibility to servers. Microsoft’s Hyper-V product has 25 percent of the market, according to IDC, compared with VMware’s 52 percent.

Companies that already have VMware installed will stick with it if they opt for private clouds, Gillen said. Still, Microsoft will provide stronger competition for new projects, he said.

“This is the release that gets them really into the private-cloud conversation,” said Mary Johnston Turner, also an analyst at IDC.

--Editor: Niamh Ring, Nick Turner

To contact the reporters on this story: Dina Bass in Seattle at dbass2@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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