For VMware, an Uncertain Future

Beset by management exits and a weaker outlook, the virtualization leader faces many rivals for dominance of the corporate data center

by Om Malik

In Las Vegas later this week at VMworld, a trade show that celebrates the red-hot technology known as virtualization and it most visible proponent, VMware (VMW), many will wonder what the future looks like for the company that single-handedly created a market for this technology.

Going into the show, the company that prompted many copycats and even more innovators to try their hand at virtualization faces a plethora of challenges, among them the threat of commoditization of its core product, increased competition, and fiscal uncertainty. But the most important question is also the hardest one to answer: Did EMC's (EMC) meddling kill the golden goose known as VMware?

2008 has been a year of uncertainty for the Palo Alto (Calif.)-based company that was previously one of the hottest technology startups around, hiring engineers at a clip faster than Google. Following a wildly successful IPO in August 2007 that valued the company at $29 billion, shares of VMware continued to rise as interest in its products grew.

As is always the case, nothing lasts forever, and earlier this year a tempered forecast for revenue and profit growth sent VMware's stock reeling. The share price drop made the already strained relationship between VMware and EMC, which owns 90% of the company, even more tenuous.

Virtualization Hot, VMware Not So Much

The internal tensions boiled over and led to the firing of co-founder and CEO Diane Greene. She was replaced by Paul Maritz, a former Microsoft executive whose startup Pi Corp. was acquired by EMC when the storage company was trying to develop a cloud computing strategy.

The move was followed by the departure of Dr. Mendel Rosenblum, VMware's chief scientist and co-founder as well as Greene's husband. Another senior executive recently returned to his previous gig at Oracle (ORCL). The exodus of these and other senior members of VMware's management team is making folks on Wall Street nervous.

Yet such nervousness comes at a time when virtualization has a strong wind at its back. People are increasingly looking to virtualization to boost the utilization of their servers, which has remained at a notoriously low level. Meanwhile, the costs of operating servers—whether in corporate or Internet data centers—is getting out of hand, mostly due to rising power costs, making virtualization a must-have technology for all companies.

According to a recent survey conducted by Avocnet, an IT management services company, 33% of companies polled had implemented server virtualization, particularly for energy-saving goals. And this trend is only going to gather momentum.

For now, VMware is the king of the heap; it enjoys an enviable position in the virtualization market, similar to that of Cisco (CSCO) in the market of routing and switches. But remember Juniper? It built a massive business by being an alternative to Cisco.