VMware Raises the Cloud-Computing Ante

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VMware needs just that as growth tapers off from the torrid pace that resulted in the most successful initial public offering of 2007. The company's revenue increased 42% last year vs. 88% in 2007 amid an IT budget clampdown and competition from Microsoft, which includes its product free with Windows. "If a customer bets on VMware, they're stuck in a high-priced, proprietary model," says Zane Adam, a senior director for virtualization at Microsoft.

Another problem: VMware's products, for all their popularity, are more of a nice-to-have than an indispensable computing platform that software developers need when they create programs and Web sites. To thrive in the new world of cloud computing, VMware needs to make its software integral to others' products and expand its market beyond improving the efficiency of applications written for Windows, says Bill Coleman, CEO of data center software company Cassatt. "I've told Paul [that]," he says.

Collaborating With Cisco

To be sure, sales of virtualization software are still growing. Sales of the software are expected to increase 43%, to $2.7 billion, in 2009, according to market researcher Gartner (IT). VMware's stock has also outperformed the broader market this year. The shares are down 9.5% in 2009, compared with an 18% drop in the Standard & Poor's 500 index.

Other pieces of its strategy are falling into place, too. At its VMworld Europe conference, the company plans to release the specifications that programmers need to communicate with its upcoming VDC-OS software. Internet hosting companies will need those specs to serve up computing power to customers via VMware's new system. So will the makers of programming tools VMware is working with to tap a new set of customers—Web 2.0 companies that build their sites using modern programming languages like Java and Ruby on Rails (the language of choice for Web phenom Twitter).

Bigger announcements are likely on tap. Cisco is collaborating with VMware to build a combination server and networking device loaded with VMware's virtualization software, called the California Project, that would let companies speed up software performance, according to a Feb. 18 research note by Samuel Wilson, a managing director at JMP Securities (JMP). Cisco and VMware "want to be the guys who provide the infrastructure that allows cloud computing to work," Wilson says. As part of the deal, Cisco will sell VMware licenses on the computers, expanding VMware's reach, he says. VMware didn't confirm or deny the research note; Cisco declined to comment.

Virtualization Boosts Performance

VMware also plans to be part of Intel's launch of its upcoming Nehalem chip for servers in March, describing how its software can help other applications take better advantage of the ultra-fast chips.

Using virtualization to eke more performance out of the latest chips is important for Web hosting companies, says Jason Waxman, a general manager at Intel. By 2012, Waxman estimates that 20% to 25% of Intel's server chips will be sold inside computers that run in supersized data centers of 1,000 machines or more.

VMware made a name for itself by addressing two bogeymen of IT departments—server sprawl and spiraling energy costs. Now it's aiming to become a more integral part of companies' computing operations. "Just being the king of yesterday's applications and not thinking about tomorrow's applications is inconsistent with what we're trying to build," Nielsen says. To ignite a new phase of growth, VMware will need to hew closely to that prescription.

Ricadela is a writer for BusinessWeek in Silicon Valley.