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What the vTax's Demise Means for Server Virtualization

For all the announcements that came out of VMware's VMworld last month, the one that was greeted with the greatest applause was new chief executive Pat Gelsinger's pronouncement that VMware was "striking that word from the vocabulary."

He was referring, of course, to the company's hated "vTax," which penalized customers for taking advantage of server virtualization to run lots of virtual machines on a single physical host.

The vTax — a license restriction that meant that the total virtual memory used by the virtual machines on a host couldn't exceed a certain amount without triggering the need to purchase additional licenses — was pretty much universally hated.

That's because the whole point of virtualization is to increase server utilization, and anything that gets in the way of that is frustrating. When it's VMware that's putting the spanner in the works then that's just plain annoying.

It was pretty clear as soon as the vTax was announced last year that it was going to be unpopular, so VMware quickly backtracked and increased the vRAM entitlements that came with each license. But that was never going to be more than temporary relief for customers. As physical hosts became more powerful and their capabilities increased, even the newly increased entitlements were bound to become inadequate for an increasing proportion of customers.

Virtually SpeakingTo understand why VMware felt it needed to impose the tax in the first place, consider this: more powerful processors mean that utilization rates go up, which also means that VMware sells fewer licenses. The vRAM tax was just an ill-conceived way to keep revenues from the company's software line strong in the face of more powerful hosts.

What Spurred VMware's Change of Heart?

So why has VMware had a change of heart over the vTax? Well, annoying your customers is always a risky game to play, unless of course you are a monopoly, in which case you can do pretty much what you like. And the fact is that while VMware wasn't a monopoly this time last year, it did have a huge share of the market.

But things are changing fast. Earlier this month Microsoft finally launched its Windows Server 2012 product, and with it comes Hyper-V 3, the most credible threat to VMware's hegemony yet. VMware has recognized that now more than ever before an angry virtualization customer can very quickly become an angry ex-customer.

Another reason is that the vTax simply didn't make VMware much money at all. While only a small proportion of customers actually ended up paying it, it was seized upon by Microsoft and others as a mighty large stick with which to beat the company.

It also put off potential new customers who would probably never have had to pay the vTax, as well as those that would have, and it also added uncertainty: would the vRAM entitlements be raised every year, as hardware specs got higher, so that it would always only be a minority of customers who would end up paying it?

Or would the entitlements remain static, in which case increasing numbers of customers would end up having to buy new licenses they hadn't budgeted for? Nobody knew.

But perhaps the key reason is that VMware isn't really that interested in plain old server virtualization anymore, as it knows that selling the software that enterprises and service providers use to build private and hybrid clouds is where the real money is. And that means server virtualization is very soon likely to become nothing more than a loss leader for VMware.

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 September 26, 2012
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