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EMC to Acquire VMWare

Storage giant EMC Corp. will buy virtualization software vendor VMWare Inc. in a $635 million deal expected to close in the first quarter of 2004, the companies said Monday. The deal widens EMC's software portfolio and shields VMWare from a head-to-head battle with Microsoft, which acquired VMWare competitor Connectix earlier this year.

VMWare's acquisition and Microsoft's plans for the Connectix technology mean the virtualization market is changing, with neither major company focused on the original desktop virtualization market. That market allowed maximum flexibility on a workstation by giving power users the ability to run several operating systems -- Windows, Linux, Solaris or Netware -- at once on the same Intel-based system.

The desktop functionality will continue to be developed and supported, according to both EMC and Microsoft, but the long-term goals are now very different. "Obviously the server revenues were already growing far faster than the desktop [revenues for VMWare] and that will just get amplified with this acquisition," said Diane Greene, president and CEO of VMWare. Greene will continue to lead VMWare as a subsidiary of EMC. It is the same subsidiary model EMC has used in two other recent software acquisitions, Documentum and Legato.

The EMC acquisition suggests that VMWare's investments in extending its software beyond the power user space into a virtualized data center resonates with the big players. While some vendors have been pursuing computing on-demand strategies from various angles, EMC obviously believes storage and server virtualization make a winning combination.

"We view this as a brand new market, a brand new category," said Joe Tucci, EMC president and CEO. "Virtualization -- we think that VMWare has cracked that nut. This is an opportunity that fits into the bigger management frameworks. Hopefully it's complementary, and it's a category of products where we believe VMWare stands almost alone."

While EMC expects VMWare to continue pumping revenues to EMC's bottom line through its existing businesses, the company also will ask VMWare's development talent to get to work on improving EMC's own storage software. The first project will be including virtualization in EMC's Symmetrix Remote Data Facility, which duplicates production site data from one of EMC's massive Symmetrix storage systems onto one or more physically separate target Symmetrix systems.

As storage hardware revenues continue to fall, storage vendors have been looking to distinguish their offerings with software rather than continuing a bruising war of price cuts. EMC has an internal goal of raising software to 30 percent of its revenues in 2004. VMWare's anticipated revenues for 2003 are about $100 million, of which slightly less than 50 percent is workstation revenues. Based on fourth-quarter momentum and planned additions to the sales force, EMC expects VMWare to see revenues of $175 million to $200 million in 2004. VMWare was profitable for all of 2003. That comes on top of about $300 million in expected software revenues in 2003 from the also-profitable Legato, meaning EMC's recent acquisitions should contribute to its software revenue goals without requiring major repairs.

EMC's Tucci also said the storage giant will work hard to maintain VMWare's partnerships with major storage competitors IBM and Hewlett-Packard. Tucci said his company is "100 percent dedicated to making sure that VMWare remains open to partners. It will also continue to be an open partner to all the server, operating system and network application vendors."

While EMC sees VMWare as an entryway into the on-demand computing world, Microsoft's strategy for the Connectix virtualization technology is much more tactical. The Connectix technology allows users to run Linux and other non-Microsoft operating systems on a virtual machine, but Microsoft is changing the focus to be a way to support legacy Windows applications on newer Windows 2000 and Windows XP machines. Microsoft has similar plans on the server side to allow unportable or difficult-to-migrate Windows NT 4.0 applications to run on Windows Server 2003 systems in a Windows NT-based sandbox.

Microsoft delayed delivery of its Microsoft Virtual Server product, which was originally scheduled to ship late this year. Now it is supposed to ship sometime next year. VMWare has been shipping virtual server technology for some time and added SMP support this year.

About the Author

Scott Bekker is editor in chief of Redmond Channel Partner magazine.

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