In-Depth

Sunshine on a Cloudy Day: Virtualization Clears Up IT's Recessionary Fears

While most companies in IT are hoping to just ride out the recession storm, those in the virtualization space are finding clearer skies.

These scary economic times would usually be even scarier for a start-up firm like Hyper9 Inc. and CTO Dave McCrory. Yet McCrory reports he's been sleeping just fine, thank you. No tossing and turning about the bad news that tomorrow might bring.

That's because business is better than expected for the 2-year-old Austin, Texas-based firm. The company just released its Hyper9 virtualization management software, and the phones keep ringing as other companies call in to find out about the product.

The explanation McCrory offers for the strong interest in Hyper9 seems out of whack in these days of doom and gloom. The economy, he says, is driving customers to the door, rather than from it.

As companies large and small expand their number of virtual machines to reap a quick return on investment (ROI), they're finding it more and more necessary to manage these machines. Hyper9 offers one solution.

"We knew there was going to be a problem out there managing virtual machines as the number grew to 30 or more at different firms," McCrory says. "We thought that tipping point would come five years from now. We didn't know it would be coming this soon. It's definitely been a pleasant surprise for us."

This boom within a time of bust has been a pleasant surprise across the entire virtualization sector, from start-ups like Hyper9 to big dogs like VMware Inc., Microsoft and Citrix Systems Inc.

"In my 10 years with the company, this is one of the fastest adoptions I've seen, [regardless of a] good or bad economy," Zane Adam, Microsoft's senior director of virtualization strategy, says of Hyper-V's rapid uptake. (Note, however, that Hyper-V's success may not be indicative of the economy, because Hyper-V is a free product.)

And despite speculation about slipping market share, the sector's biggest dog, VMware, is making happy noises about growth and adding 300 more positions to its 6,300-strong workforce, even in the face of increasing competition from the Microsoft/Citrix cabal and smaller virtualization vendors.

"It's reasonable to anticipate more companies getting started in virtualization, but I think we're pretty confident in the capability and reliability of our product," says John Gilmartin, Sr., director of product marketing at VMware.

Meeting, Exceeding High Expectations
In better days, the virtualization sector's success would be no surprise; analysts have been bullish on its future for years. Earlier this year, as the stock market tumbled and unemployment statistics grew, Gartner Inc. predicted virtualization software revenues would jump by 43 percent, moving from $1.9 billion in 2008 to $2.7 billion this year. The biggest growth in the sector, Gartner said, would be a quadrupling of virtual desktop infrastructure (VDI) solutions from $74.1 million last year to $298.6 million this year.

Server management software is predicted to increase 42 percent, from $914 million in 2008 to $1.3 billion this year. Infrastructure investment is expected to increase by 22 percent, from $917 million to $1.1 billion.

In fact, virtualization was the only bright spot in Goldman Sachs' take on IT spending for 2009. Its survey of 100 CIOs found that IT budgets would drop this year, the first time in the history of the company's survey. The only exception is virtualization spending, which was ranked as No. 1 in priority spending by the CIOs.

"ROI is the name of the game," the survey researchers wrote. "CIOs have emphasized to us that they are buying on a need-versus-want basis, are often downsizing deals to fit with current budget constraints, and are searching for solutions with a high and fast ROI."

History Repeats?
This phenomenon of good business in bad times is not unprecedented for the virtualization sector. VMware, for instance, saw its first successes during the 2001-2003 economic downturn. Some students of history are hoping for a repeat.

"I was pretty sure that we in the virtualization industry would be safer," McCrory says. "VMware saw a good deal of success in the last down cycle with server consolidation. At the time they were very, very successful getting beachheads in an entirely new market."

Those beachheads established five years ago opened the way for today's virtualization growth. The proof-of-concept and proven ROI of six to nine months has made virtualization products even more of a sure bet when it comes to cutting costs.

"Some of the conversations we're having now with customers involve a high level of ROI justification," says Sumit Dhawan, Citrix's vice president of marketing. "We're seeing an increase in interest to have those kinds of conversations [now versus] 12 months ago."

Catalogue of Growth
The virtualization gains are being reaped by a spectrum of companies, large and small, new and more established. Tim Lucas, president and CEO of Surgient Inc., says his Austin, Texas-based company's six years of experience in the field of managing virtualization for customers such as EMC Corp., Siemens AG and Hewlett-Packard Co. has established a solid foundation for growth during the down economy.

"In 2008, we grew revenues about 65 percent," Lucas says. "We explain that growth as the result of having a product that is the most mature, most scalable and robust in the field. More customers bought more and more quantities."

This year Lucas expects anywhere from 20 percent to 50 percent growth -- more toward the top of that scale "if the other shoe doesn't fall," in regard to the economy.

And for now, Lucas sees the down economy as a sales booster. "It's probably brought the curve forward a bit," he says. "There's been real momentum."

The story is the same at Microsoft, which has seen a doubling of demand for Hyper-V every other month since it was introduced in late summer of last year.

"Acceptance has been very, very rapid -- more so than I had projected," says Adam, who claims Microsoft already has a 23 percent share of the hypervisor market. "We're seeing and winning much larger RFPs [requests for proposals] than in prior times," he notes.

Bucking the Downturn
The continuing success of the virtualization sector is not unexpected. The seers at Gartner and other firms remained bullish on the industry's prospects, even as the rest of the economy began to fall down. What is a bit surprising is the enviable debate as to whether the recession has actually increased business, as companies consider quicker adoption of virtualization tools to cut capital and operational costs at an even faster pace than planned.

"Business is unaffected, if not definitely increasing out there because of the economic situation," says Hyper9's McCrory. "People have new projects they need to bring online, so they're using virtualization to stretch that equipment out more."

McCrory and others agree that the timing couldn't be better for virtualization vendors.

"It's all coming down to the proven product," says Citrix's Dhawan. "In this economy, the most important factor that's going to work is ROI. Any product that has a proven ROI is going to have strong play."

These factors aren't much of a surprise to most in the industry. The growth in virtualization is seen as inevitable, come good times or bad. But now the market is evolving to a broader range of products and applications built on server virtualization's initial success.

Lilac Berniker, senior director of marketing and business development at Washington, D.C.-based Fortisphere Inc., cites Gartner analysts who say the continuing growth rate of virtualization has created a need for the management products that Fortisphere and other vendors offer.

"It's a second-order relationship," she says. "The growth rate is driven by the economic situation. And that creates the need for other products."

The SMB Play
The cost savings, along with more products and pricing competition, are also bringing in more customers from the small to midsize business (SMB) sector. Citrix's Dhawan says his company has seen its SMB customers go beyond the ROI model that brings in larger enterprise customers with the promise of consolidation of data centers and cuts in operating expenses. For smaller companies, the allure of virtualization is also in the flexibility it offers.

"They may want employees to work at home because they've cut down on office space, or collaborate without travel requirements. In these economic times, the SMBs are finding different reasons for additional technologies," he says.

Chris Barclay, director of product management at Virtual Iron Software Inc., attributes his company's 65 percent growth in the last quarter to this expanding marketplace of customers and products. Virtual Iron targets SMBs with its suite of virtualization tools.

"We're going beyond simple server consolidation projects and offering mail recovery, load balancing -- a spectrum of use cases," he says.

One major area Barclay sees contributing to growth in sales is the disaster recovery market. "If you look at some of the data, disaster recovery benefits are eclipsing the capitalization value," he says. "Because virtualization is agnostic, you can pick and choose which data you want to protect. You can see ROI within a few months and have a more highly reliable infrastructure."

Barclay and others also see a kind of critical mass of products, customers and buzz adding to the fervor for virtualization.

"We're seeing a lot of activity on our forum site," he says. "People are often answering other people's questions before we can get to them. Companies are coming to us, saying 'So-and-so at this company recommended us.' All this positive feedback is the result of people seeing this as an opportunity."

The downturn is also accelerating the next phase, which could well be VDI. As little as six months ago, the smart money was on a gradual increase in that sector over the next five years. But replacement and maintenance costs of traditional desktop systems have brought more customers to the product lines much faster than predicted.

"Last year there was a lot of discussion and hype about the desktop sector," says Microsoft's Adam. "Now we're seeing a much more rapid adoption and production."

Dhawan is not surprised by the surge in desktop virtualization customers.

"Desktop administration and maintenance represent a large, large amount of IT budgets," he says. "Enterprise customers are looking at changing the three- to four-year desktop-refresh cycle."

Not All Sunshine and Roses
Any clouds on this otherwise sunny horizon have to do with employment levels. Microsoft's projected layoffs of 5,000 employees are well-known. Zane declines to say how this has affected his group, other than to say his people "are all very busy."

Citrix, also considered a major virtualization player, has laid off 10 percent of its workforce in restructuring as a result of its reduction in the number of virtualization products. "I think we're being very, very cautious in a period of uncertainty," says Dhawan.

The rest of those interviewed for this article were markedly cautious about adding additional staff despite their companies' strong sales. McCrory summarizes the general attitude, saying although he hasn't yet added significantly to his staff, "There will be hiring before layoffs."

But McCrory adds a sober note to show the virtualization sector isn't immune to all aspects of the downturn: "My 401(k) is getting the heck beat out of it," he laments.

Adjustments
Even though there's a growing demand for their products and services, companies are finding reasons to adjust to the tricky conflict between a company's desire to acquire virtualization products and the general jitters brought on by a sinking economy.

"We had to change the way we were talking to the market," explains Fortisphere's Berniker. "Initially it was about 'More innovative ways of managing.' We had to retrench that into: 'The economic benefits of server consolidation.' The narrative had to shift. That's the part that wasn't planned."

Citrix has reacted to the spreading list of customers by simplifying its marketing plan, trimming away some of its 20-plus products into broader categories to speed sales. It has also scaled back work on new products and technologies that may be harder sells.

"As part of this restructuring, we decided to shelve them until we have more confidence in the economy and IT will be more comfortable with those types of technologies," says Dhawan.

Caution: Slower Growth Ahead
Microsoft and VMware also report that more companies that are jumping into virtualization are a bit more cautious about buying everything at once.

"When I'm talking to the CIOs of larger companies, they've become more choosy on where they spend the money," says Zane. "They want to control the cost of hardware and management."

VMware's Gilmartin has seen the same trend, with enterprise customers doling out money by the quarter rather than making wholesale purchases for the year.
"People are thinking a bit more about pay-as-you-go," he says. "They're adopting it for a small number of virtual servers at a time rather than volume purchasing. We're seeing a little more caution."

VMware is also targeting likely growth areas, most notably the health-care industry. Gilmartin says the Obama administration's plan to cut costs by digitizing medical records offers great opportunities for large-scale virtualization access and security systems.

"As health-care operations look for better ways to put up important and sensitive data, we think our software is going to be a fundamental player," he says. "We want to encourage tech vendors to build solutions around our platform and our software."

Microsoft's Adam and Citrix's Dhawan both dismiss the idea there will be an ultimate winner and loser in the game. "Will the market grow, move and shift?" Dhawan posits, then answers his own question: "I think that will happen just as it happens in any market. At some point we'll see a more commoditized market."

Challenging VMware's Virtual Dominance

While VMware pursues its sales strategy in down times, it seems most other vendors in the virtualization galaxy are pursuing VMware. The common pitch is to talk about cost savings versus comparable VMware installations.

Take Virtual Iron's Chris Barclay, for example: He touts that his company's Enterprise Edition software costs about $800, compared to VMware's minimum $3,000 price tag.

"Our price comes in at VMware's maintenance cost," he says.

Fortisphere's Lilac Berniker notes that her company's product "costs a fraction of the price of the VMware platform," assuring customers of an even quicker ROI.
And then there's Microsoft. "The options in the past were limited to a closed proprietary version from VMware," Microsoft's Zane Adam says. "With Microsoft and Citrix you get machines that can move back and forth, and you can save 50 to 60 percent with our platform versus VMware. Customers get everything they ever had, along with the management of the service."

Such challenges, especially from the Microsoft juggernaut, have raised questions about VMware's long-term prospects. Although still acknowledged as the industry leader, with somewhere around 80 percent of the market share, popular speculation centers on how long VMware can maintain its grip.

VMware has acknowledged the competition. Last July it announced it would offer its embedded hypervisor, ESXi, for free, as a means of luring customers in for other products, such as VMware Infrastructure.

VMware's John Gilmartin dismisses the idea that his firm's days as a leader are numbered. "Our vision of bringing out new products and innovation will allow us to maintain a pretty good technology lead," he says.

Those interviewed for this article weren't ready to write off the industry leader, either -- not even Microsoft. The consensus? VMware may see its share shrink some, but it will be a lesser share of a greater market.

"I'm not going to predict [VMware's] demise," says Barclay. "Companies like us are going to be taking business from them and Microsoft is forecasted to take a bigger share of the pie, but I believe the pie itself is getting bigger."

Hyper9's Dave McCrory takes the view that there's room for everybody, especially for firms like Hyper9, which is developing products that can be used across different platforms. "People are looking to have mixed environments," he says. "We want to support them all."
-- F.B.

Adam sees the customer becoming the ultimate winner. "Multiple vendors mean better pricing for the customer," he says, citing the range of options growing by the day. "Choice is always the big difference."

A Bright Future
This win-win situation for the virtualization industry and its customers is likely to continue for the same reasons other tech sectors are likely to suffer. In today's double-whammy of tight money and plunging revenues, few firms are ready for any big purchases, especially of new, unproven technologies. But virtualization is proven, offers a quick turnaround on investment and allows companies to do more with less.

"As an industry, virtualization still has a very strong demand," says Adam. "It can address a lot of cost issues while providing a dynamic data center out of the box."

For the smaller firms like Fortisphere, this serendipity of timing is a welcomed gift: "We didn't consider that we'd be walking into this economy in 2006," says Berniker. "I wish we had had that kind of foresight. There're lots of ways to make money if you know the future."

About the Author

Fred Bayles, a Boston-based freelance journalist, writes regularly about customer service and other business issues. He is a former national reporter for The Associated Press and USA Today.

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