5 things VMware must do to fend off Microsoft

With 170,000 customers, including every member of the Fortune 100, you might think VMware's toughest task is stocking enough paper to print up new customer contracts. But the industry's biggest x86 virtualization vendor is facing a strong challenge from Microsoft, which is enticing IT executives with Hyper-V, an alternative that may not be quite as sophisticated as VMware but is less expensive.

2010 will be a crucial year for both VMware and Microsoft in the virtualization race. Here is a list of five things VMware and its CEO -- former Microsoft executive Paul Maritz -- have to do to stay ahead of their biggest rival.

1. Cut prices

If there's one major complaint customers and analysts have about VMware, it's that prices are too high.

"Are you going to spend five times the cost [of Microsoft]?" asks Burton Group analyst Chris Wolf. "Is it five times the features? Most folks, looking at their wallet, would say 'I don't think it is.'"

VMware has several different pricing schemes and the price each customer pays depends heavily on which version of the software they use and how many servers and workloads they have virtualized. According to a vSphere pricing document, "VMware vSphere Advanced" costs $2,245 for every processor, allowing up to 12 cores and 256GB of memory.

VMware's management software, known as vCenter Server, costs $1,500 for three hosts, or $5,000 for unlimited hosts. Numerous add-ons sold by VMware can raise a customer's bill significantly. VMware offers a free version of its hypervisor, but with limited functionality.

Microsoft offers Hyper-V, including advanced features such as live migration, as a free download. Customers planning big virtualization deployments are likely to buy management tools as well, and Microsoft's Virtual Machine Manager costs $869 per physical server. 

VMware has argued that its software can be less expensive than Microsoft's on a per-workload basis, because VMware achieves higher levels of virtual machine density on each physical server. VMware also offers a small business version of its hypervisor that starts at just $166 per CPU, says Bogomil Balkansky, VMware's vice president of product marketing.

"What we've been doing over time is really stretching the range of capabilities that we offer and providing different price points," he says. "So far we think we do meet the needs of the different market segments we're trying to serve. We don't have any plans right now to adjust pricing."

Few, if any observers would claim that Microsoft's virtualization technology is better than VMware's today, but Microsoft has closed the gap significantly and for many customers that may be good enough.

That's the opinion of one customer who switched from VMware to Microsoft. Roger Johnson, technical lead for the enterprise systems group at Crutchfield, a consumer electronics retailer in Charlottesville, Va., says "cost was the biggest deciding factor."

Johnson says VMware's technology is sound, but he thinks VMware's insistence on charging significantly higher prices than the competition reflects an "egotistical mentality." Crutchfield was running VMware in 2008 but completely converted its virtualization deployment to Hyper-V, and is now running 225 Hyper-V virtual machines on 11 servers. The total Hyper-V investment came out to $10,000, but would have cost at least three times that much with VMware, he says.

Johnson is a former Microsoft employee, so he may not be the most unbiased observer. But even VMware customer Scott Lowe, CIO of Westminster College in Missouri, thinks it's time for VMware to lower the cost.

As an educational institution, Westminster College gets a discount "but it's still pretty expensive to license," Lowe says. "I think VMware is going to have to address the cost of their solution sooner rather than later to stay competitive with Microsoft."

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