Microsoft vs. VMware: Rumble in the virtual world

Two weeks ago, VMware found itself squarely in Microsoft's crosshairs -- and chaos followed. VMware lowered its revenue expectations for the year earlier this week. Its stock took a nosedive, which likely led to President and Chief Executive Diane Greene's sudden resignation yesterday.

All of this comes on the heels of an industry-rattling announcement: Microsoft threw down the gauntlet late last month with the public release of Hyper-V, a free hypervisor technology bundled with Windows Server 2008 that undercuts VMware's standard-bearing ESX Server.

Hyper-V, which enables different operating systems to run on a single server, received solid marks from the InfoWorld Test Center. "Getting that hypervisor out there is a major first step," says reviewer Randall C. Kennedy. "Over the next 12 to 18 months, Microsoft will continue to tweak Hyper-V" to compete more strongly with ESX server, he notes.

If any of this sounds familiar, it is.

Most software vendors tremble at the sight of Microsoft slouching toward them -- a harbinger of market share doom. Microsoft wades into an emerging market with a bare-bones product, then leans on the competition using its heft in product development, marketing prowess, and massive installed base to commoditize the product category and topple the market leader.

The tech industry is awash with brands of many innovative companies whose high-flying technology was slowly devoured by the Redmond giant: Lotus. Borland. WordPerfect. Corel. Novell. Apple. Netscape. Can VMware, last year's Wall Street darling whose name has become synonymous with virtualization, survive Microsoft's awesome embrace-and-extend campaign?

Early signs point to a difficult road ahead. Two weeks after Microsoft's Hyper-V announcement, VMware said that revenue growth for the year "will be modestly below" its previously stated goal of 50 per cent -- and shares free-fell 26 per cent to US$39.30 on the news. Microsoft veteran Paul Maritz will replace the ousted Greene.

Despite VMware's gloomy week, Chris Wolf, an analyst at the Burton Group, cites a couple of ways the company can stay a step ahead of Microsoft in the virtualization race: One is a big lead on virtualization technology that should buy the company some time. The other is shifting frontlines, as the market moves from commodity hypervisors to feature-rich virtual-infrastructure management tools.

"It's shaping up to be a very interesting battle," Wolf says.