Monday, August 06, 2012

Interesting moves by VMware

Many years ago I made a prediction that VMware (or more specifically its master EMC) would focus on an open source platform play and look to monetize its existing hypervisor based business.

The latter part I suspected will occur through an IPO of VCE or some equivalent move. The reason being is that at this moment much of the buzz in financial analyst circles is around hybrid cloud environments consisting of a combination of private & public infrastructure and VMware's technology is touted as well placed for this industry.

What the analysts don't seem to understand is that this hybrid model is purely transitional and will be replaced in the majority by a hybrid model of public and public i.e. use of multiple public sources. The private enterprise cloud market is at best transitional and has a limited lifespan until it becomes niche.

Still, there's nothing like selling at the top of the market an area of technology which you know will ultimately be disrupted. If the analysts help you do this, bully for you.

However, EMC is very astute. There's an awful lot of value which can be gained by providing a commodity infrastructure services through the development of a wide ecosystem and the exploitation of such through an ILC (innovate-leverage-commoditise) model.

So, I've often toyed with the idea that VMware (EMC) would :-

1.  Develop and launch on an open source platform play. This is a key part for the future in terms of developing a competitive market of providers, destroying any competitor's ability to differentiate in this space and enabling VMware to exploit this space with a range of higher order services (see management tools).

2.  IPO or sell the existing hypervisor technology. This is to maximimize the value of a range of technologies which will ultimately be disrupted and provides a neat way of overcoming inertia to change within the organisation by spinning it out of the company.

3.  Develop and launch a range of cross public cloud management tools. This would be part of a future plan of creating brokerage, exchange and assurance capabilities across both infrastructure and platform and monetizing these layers of the computing stack.

4.  Launch a major open source IaaS offering.

My thoughts on this ...

So, the first part and the development of an open source platform play occurred a couple of years after I made the prediction. From all reports, Cloud Foundry is making great progress and there are multiple providers being set up from ActiveState, Uhuru Software,, Tier 3, AppFog and VMware's own service.

The second part of the prediction I consider likely to happen in the near future and I view that VCE is the likely vehicle for this. It's critical that any IPO is achieved prior to any market decline and the subsequent questioning over the future of private enterprise class clouds. It's not that they're not viable, it's just you have to run them with a brutal commodity focus to make them operationally efficient.

I've seen examples of private clouds operating at a third the price that AWS charges publicly on a like by like comparison of default EC2 instances. Which is why I'm one of those who argues that AWS is probably operating at a very high margin (>60%) and there's a lot of scope for price reductions.

I believe there is a reason why AWS doesn't simply reduce its public pricing drastically and that's because I suspect that AWS has a bottleneck - buying up enough land to build data centres to keep up with its rapidly expanding growth. Dropping prices aggressively will just increased demand and exacerbate this problem. Any price reductions will have to be carefully managed.

This is also why I think that the GCE (Google Compute Engine) focus on initiating a price war is smart because whenever you face a competitor with a bottleneck, creating a price war to increase demand beyond their ability to supply will naturally fragment the market.

I said the same to IBM, Dell and HP back in 2009 (when I was with Canonical) and told them it was in their interests to move quickly and create a price war with Amazon unless they wanted to end up being in a strategically weak supplier position to a few dominate cloud players. I don't think any of them listened but that's not my problem, that's theirs.

Anyway, to operate at the levels to be operationally efficient it is going to be difficult if not impossible when you use proprietary licensed software. My models reckon you can afford to spend a couple of dollars (i.e. $1-3) per year per EC2 equivalent on software licensing & software maintenance. We are told that vCloud Director is "non-existent" in the service providers space, this doesn't surprise me.

I don't see a big future for these software products in the public service provider space and I only see a time limited future in the private enterprise space before it becomes niche. Hence IPO before the trouble hits is a smart play in my book and EMC does tend to act in a really smart fashion.

However, this leaves two others parts of the prediction which I've not made public before especially as the open source play I've considered to be too bold a move even for EMC. I'm now coming to the view that I've underestimated their boldness.

My view here is fairly simple. Once an IPO had been achieved (or some other mechanism of separation) then a fully fledged IaaS attack could occur. I've been watching this space with interest looking for hints that such a change might be coming which is why I'm increasingly confident that this is a possible game they might play.

First, I noted that VMware / EMC joined the Open Compute project which if you're going to get into the game of building massive scale and efficient commodity based data centres is where I'd start.

Next, I noted that Paul Maritz has been promoted up to running strategy for EMC itself, which in my view is a shoe-in eventually for the CEO role.

Then, I noted that VMware acquired Nicira.

Finally, I heard about project Zephyr and how VMware (i.e EMC) was willing to attack the IaaS space. This was enough to make me publish this post.

Now, if I was going to play a major open source IaaS game then I'd probably base it around Cloud Stack (Citrix's donation of $200m worth of cloud technology to the ASF) and combine this with an S3 equivalent and software networking capabilities. For the S3 equivalent I would probably acquire Basho for Riak CS and then add this into the Cloud Stack project under ASF.

If I then had within the company the following skills - hypervisor technology, large scale efficient data centres (i.e. open compute), distributed storage (Riak CS), software defined networking (Nicira), management tools (Dynamic Ops) then I'd be almost ready to play a major open source IaaS play.

The other bits I'd need are some partnerships on highly commoditised hardware (I'll note the recent partnership between EMC and Lenovo), acquisition of large data centre space (Project Zephyr) and skills with Cloud Stack (which VMware already seems to have).

Of course, Project Zephyr will be touted as selling existing technology but if I was running this play then that would be just be marketing cover for the hidden agenda. And to be truly Machiavellian, given that there would be an inevitable reaction of existing partners to Project Zephyr, then I'd use this as marketing cover for the reasons why I'd IPO VCE - an argument of separation of concerns.

So in my play, into VCE would go the existing hypervisor business (along with all the inertia it creates to change) and then this would be IPO'd in order to "avoid the channel conflict" that Zephyr creates with partners and Nicira creates with Cisco. In one swoop I'd have maximised value (through IPO) on a business that I think will be disrupted in the medium term and kept all the components that I think are the long term future by using a completely plausible story of channel conflict. The capital I'd have raised on an IPO would be ploughed right back into an open source IaaS play which I would then reveal.

At lot of what is needed to make this happen appears to be already in place, so as completely far fetched as it sounds, I'm expecting in under 18 months for EMC / VMware to have acquired Basho, launched an open source IaaS effort and IPO'd VCE.

Of course, I have no inside knowledge of EMC / VMware strategy. Their plan maybe something else but this is what I would do. If if happens and it succeeds then this will be a truly outstanding example of how to deal with inertia and the threat of disruption.

[Update 15 Mar 2013]

First, VMware is pushing heavily on the hybrid model which is all par for the course and the open source platform plays have been made and pushed into a new spinoff known as Pivotal Initiative (under Paul)

Second, EMC itself appears to be scouting out some more commodity IaaS providers which makes perfect sense given the above.

In my original version, EMC would have pushed the "to be disrupted technology" into VCE and flogged it off at the top of market whilst keeping the interesting future technology within VMware. The excuse for flogging VCE off would be a channel conflict because VMware would make a big commodity IaaS play.

However, given that EMC has pushed the interesting future technology into the Pivotal Initiative, leaving the "to be disrupted technology" inside VMware then VMware itself can be flogged off (i.e. you don't have to use VCE to create the separation).

However, you still need the plausible excuse of channel conflict and a way of making a big commodity IaaS play. Which is why I think the EMC interest sounds reasonable.

So rather than:-
  • "to be disrupted technology" into VCE (EMC exit)
  • "interesting future technology" in VMware (EMC keep)
  • VMware to play a commodity IaaS play  (EMC keep)
  • VCE ("to be disrupted technology") is then flogged off (EMC exit)
An alternative route would be:-
  • "to be disrupted technology" in VMware (EMC exit)
  • "interesting future technology" into Pivotal Initiative (EMC keep)
  • EMC to play a commodity IaaS play (EMC keep)
  • VMware  ("to be disrupted technology") is then flogged off (EMC exit)
The effect is the same, EMC keeps the interesting tech (open source platform play), builds a commodity IaaS play and flogs off hypervisor technology for a good price. I was a bit surprised that DynamicOps etc remained within VMware, this seems a curious decision.

Will it pan out like this? We shall see. Whilst overall trends (e.g. evolution from product to utility) are highly predictable, the actions of individual actors aren't.