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Interesting Times Ahead in the Server Virtualization World

VMware is the 800 pound gorilla in the world of server virtualization, dominating the market with more than 50% market share, according to Gartner's Server Virtualization Tracker from last year.

And it's not been averse to flexing its muscles and splashing the cash over the last few years: VMware shelled out a whopping $1.54 billion for mobile device manager AirWatch, Virtually Speaking$1.26 billion for software-defined networking company Nicira, and an undisclosed but no doubt substantial sum for desktop-as-a-service company Desktone.

VMware itself was bought by EMC in 2003 for what looks today like a steal: a mere trifling $624 million. But at today's share price VMware has a market capitalization of about $33 billion. (EMC still owns about 80% of VMware's stock, which probably depresses the true worth of the company slightly.)

So VMware is a company that has grown hugely over the last dozen years. In the quarter just ended VMware announced it had made sales of $1.7 billion, bringing annual revenue for 2014 above $6 billion for the first time in the company's history.

Size Is All Relative

Six billion dollars in revenues in one year certainly seems like a lot of moolah. Until you start looking at the really big gorillas in other tech sectors, that is. Then you see that VMware is relatively nothing more than a 98 pound weakling.

Take Microsoft, for example. Microsoft is a big player in the server virtualization space with around a 30% market share (maybe a bit more), but it also has dominant interests in Windows operating systems, productivity software, cloud operations (as does VMware) and much more.

Microsoft's second quarter sales to the end of 2014 were $26.47 billion. That's just for the quarter, not the year, remember. These figures dwarf VMware's puny $1.7 billion in sales.

And what about Apple? It's more of a consumer hardware company than a business software company, but Microsoft and (to an extent) VMware sell hardware too.

Apple's quarterly revenues to December 27, 2014 came to $74.6 billion, and net profits were $18 billion — figures that make VMware's pale in significance.

To put that in to some sort of perspective, VMware's sales for the whole of 2014 came to less than Apple's sales by January 9th of that year or Microsoft's by January 23rd. In fact Apple makes enough profit in six months to buy VMware outright (assuming of course that EMC would sell its holding) at the current share price. Heck, it could buy EMC with less than a year's worth of profits.

So just as AirWatch was a big fish in the MDM pool but just a guppy for a company the size of VMware, let's not forget that VMware may be a big fish in the server virtualization pool, but Microsoft is a much bigger fish in the same pool, and Apple is a much bigger fish in a different pool altogether.

Are we suggesting that Apple wants to own VMware? No, there's nothing to suggest that it does. Or Microsoft? Again, no. That would be highly unlikely: it already has a healthy growing virtualization business based around Hyper-V.

But might Apple ever want to own VMware? It's possible. Virtualization technologies and particularly related cloud technologies are likely to become more important for companies such as Apple over the coming years.

Looking Beyond Microsoft and Apple

What about one of the other big technology leviathans like Oracle, IBM and so on? Stranger things have certainly happened.

Would EMC ever sell its stake in VMware? It is something that's being discussed, in particular by activist investor Elliott Management. And could EMC be bought outright, VMware and all? It's been considered in the past, by the likes of Hewlett Packard, reportedly.

So for now VMware may be the 800 pound gorilla in the virtualization market (or the biggest fish in the virtualization pool if you prefer.) But let's not forget that there are much bigger gorillas out there, and VMware has something they may well decide that they want.

Interesting times lie ahead in the virtualization world.

Paul Rubens is a technology journalist and contributor to ServerWatch, EnterpriseNetworkingPlanet and EnterpriseMobileToday. He has also covered technology for international newspapers and magazines including The Economist and The Financial Times since 1991.

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This article was originally published on February 17, 2015
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