From the whatever-people-will-pay department
My colleague at Data Mobility Group, Walter Purvis, sent me a link to a Barrons blog which summarizes the thinking of several analysts on the issue of VMware’s worth.
Let a thousand flowers bloom
There is some disagreement.
What the analysts are trying to do, at least some of them, is figure out the current value of the future cash flows of VMware. Others are less analytical and just say, essentially, recent tech company sales get x times their revenue, so VMware is worth anywhere from $8 to $12 billion given its current sales.
While a sale or IPO is a point-in-time “liquidity” event, analysts who forecast stock prices look to future cash flows. Since EMC professes no interest in spinning VMware out, one has to look at the impact on EMC’s cash flows. Wall Street is willing to pay for future growth. That’s why some of the analysts are trying peel back the onion and determine the longevity of VMware’s rapid growth.
The analysts who appear to have thought about it agree that VMware will saturate its primary market of server virtualization in the next few years. If Longhorn works – hey, it could happen – maybe even sooner.
This is where it gets weird
They also agree that desktop virtualization is the real opportunity for VMware. Here’s one theory from a comment on the Seeking Alpha blog:
Today of course there are billions of dollars spent to secure personal computers from viruses, spyware, malware and phishing . . . . Virtual machines offer a very powerful solution to this problem by isolating different activities (like say browsing the web, or playing that multi-user video game, or even leaving the corprate firewall) in a separate virtual machine that is destroyed at the end of the users session. In effect, who cares if you pick up viruses and spyware when at the end of your session you just destroy the virtual machine taking the viruses and spyware with it. It is a super powerful and elegant solution to one of the most persistent problems plaguing PCs today. In this sense you could imagine why almost 100% of all PCs in the future could come with virtual machine technology.
The phishing reference struck me as odd: exactly how does virtualization keep me from logging into a fake bank site and giving up my password? That was problem one.
Yet I’m thinking, OK, I have a virtual machine. I download a pdf or something that I want to keep. Presumably that pdf goes on a real disk. So even after I zap the session’s virtual machine, I still have stuff on my disk that might come back to bite me. Or is that just paranoia? Somebody who knows more than me please comment.
Using virtualization to create time-sharing computer systems
Another analyst sees the desktop market differently:
. . . take away your desktop PC, and replace it with a thin client tied back to a server running many instances of corporate desktops at the same time. He thinks the average compression ratio for desktop PCs would be about 45-to-1: one server taking the place of 45 PCs. As he notes, nothing changes for the software vendors in that scenario – you’d still need the same number of software licenses for anyone using Microsoft Office – but you could save considerably on hardware costs, and dramatically improve the ease of desktop administration.
Again, I can’t judge the technical aspect of this approach, but it seems whacked on its face.
For example, according to this pdf, physical memory is the most-used resource in VMware ESX. So to get that 45:1 ration, you’d need a pretty big server, one that could support at least 32-64 GB RAM and sufficient disk for everyone.
What kind of application would meet these requirements? Call centers, sure. Office PCs that are lightly used, sure. But the secular trend is towards notebook computers and away from desktops. So this is a massive market? For how long?
As I’ve noted before, I believe VMware solves the wrong problem: putting many virtual servers on a single physical server. The long term issue is getting many servers to act as a single virtual machine.
That said, it clearly has continuing value. That isn’t the issue. Growth – how much and how long – is the issue.
The elephant in the room
And how does Microsoft play here? Are they just going to stand back and give up $12B of market cap?
I don’t think so.
Whatever the technical merits of virtualization for solving the PC world’s problems, the market reality seems stark: Microsoft gives away basic virtualization in Windows Server – and charges for specialized add-ons while selling even more Office/Vista virtual machine licenses.
Microsoft bought a virtualization company a few years ago. They have in-house expertise – and I know they have Ph.Ds – and they’ve made noises about the virtualization market.
IMHO, Microsoft could rip the heart out of VMware’s business in 18 months from a standing start. I don’t even see an antitrust downside. And since they own both sides of the server-client interface, they’d have a level of control that VMware can only dream of.
The StorageMojo take
Ultimately VMware is worth what investors are willing to pay for it. The idea that VMware is simply going to keep growing at its current torrid pace for the next several years seems naive to me. The corpses of Microsoft roadkill litter the history of PCs.
If I were tempted to join VMware for the sake of those stock options, I’d want to make sure they vested in three years, not five, and that vesting started at six months, not twelve. When Microsoft crashes the party the fun is over.
Update: I added a few lines to clarify some points.
Comments welcome. I don’t know anything about VMware, so I’d love to hear what folks think of the proposed scenarios.