Software ignites company's growth

PALO ALTO FIRM'S `VIRTUALIZATION' BOOSTS DATA CENTERS

By Therese Poletti
San Jose, Calif., April 30, 2006

This coverage originally appeared
in the San Jose Mercury News:

Nathan Myrold, a computer administrator for snowmobile maker Polaris Industries, doesn't have to go to the office in the middle of the night anymore to do fixes on the corporate network during off-hours.

By using software developed by Palo Alto-based VMware, Myrold can easily move software applications from one server to another -- during business hours and without any downtime for the company.

"Prior to VMware, that wasn't possible. You had to be there at 3 a.m. to do this,'' said Myrold, who used to get up in the middle of the night, sometimes in frigid Minneapolis winters, to do shutdowns or fixes when the network wasn't seeing much usage.

Polaris is among 20,000 companies using VMware to make their data centers more efficient and economical. These customers have helped fuel explosive growth at the 8-year-old company, which makes "virtualization'' software. The obscure but important software makes servers -- the workhorse computers that run Web sites and transactions -- more flexible and efficient.

VMware is now bursting out of its offices on bucolic Porter Drive in Palo Alto. It will soon begin building a new campus nearby, not far from Stanford University, where its technology originally was developed. VMware, with 1,600 workers worldwide, expects to double in size locally, to 2,000 employees by next year.

VMware's first-quarter revenue soared 64 percent to $131 million, compared with a year earlier. And its profit margins are hefty: In 2005, the company's gross profit was $317.5 million, or 82 percent of revenue.

VMware's stunning growth caught the eye of EMC, which bought the business in January 2004 for $625 million. VMware now operates as an autonomous subsidiary of EMC, the Hopkinton, Mass., storage systems giant.

VMware was founded in 1998 by Mendel Rosenblum, a Stanford computer science professor and his wife, Diane Greene, who is president of the company. The founding team included two of Rosenblum's students and another engineer.

Rosenblum took an arcane idea pervasive in mainframe computing and brought it to the Intel-compatible PC and server market.

"He decided to revisit virtualization from the '60s and the '70s,'' Greene said. "They named the project Disco.''

Virtualization software is a layer of software that sits on top of a computer operating system, whether it's Linux or Windows. It emulates the computer so that multiple copies of an operating system think they are each running on their own machine, when in reality they are all running on one physical computer or network server.

During the 1960s, IBM pioneered the use of virtualization to allow partitioning of its mainframes, but it became less necessary as cheaper servers and PCs became widespread.

Two trends have led to the rapid adoption of VMware's software, which started out as a desktop computer product, given away over the Internet in 1999.

Funding materializes

The first was the rise of Linux. The second was the growing need to streamline computer networks in corporate data centers.

Without any marketing, VMware's software captured the attention of the geek community with its ability to run Windows and Linux on the same desktop. A student at Cornell University volunteered to host VMware's first release, so all the Linux developers who had read about it on Slashdot could download their free copies.

"We got all these incredible e-mails,'' Greene recalled. " 'I've got Windows booting on Linux!' ''

They soon received funding from angel investors who also had close ties to Stanford -- President John Hennessy; Andy Bechtolsheim, a co-founder of Sun Microsystems and former Stanford graduate student; Stanford Professor David Cheriton and executive Ori Sasson.

In 2000, Google, an early customer, touted VMware in a press release about how it was using the VMware software to test its search engine on one machine acting as if it were in multiple test environments. Also in 2000, VMware got $20 million in funding from Dell.

The second boost came after the dot-com bust, when many companies realized they had too many servers taking up too much space in expensive data centers. VMware's ESX Server product helped companies make more efficient use of their servers.

Increased efficiency

"Like a lot of companies, we were dealing with server sprawl,'' said Myrold of Polaris. "We were running out of floor space.''

Myrold said Polaris has "dozens'' of HP Proliant servers in racks in its 7,500-square foot room. But Polaris needed more servers for individual business units and its growing Web presence, where it markets snowmobiles and all-terrain vehicles.

It began using VMware's ESX Server software to consolidate multiple servers onto one. Polaris now typically has 18 "virtual machines'' running on one host server, each running their own separate applications or data for individual departments. Polaris increased its server capacity 50 percent by adding virtual machines, but its costs have dropped 65 percent.

VMware now faces competition on a few fronts. Microsoft, which also has virtualization software, said recently it eventually plans to build virtualization into the Windows operating system.

Another threat is an open-source project called Xen, now managed by a company in Palo Alto. Since its founding in 2004, XenSource has received $23.5 million from Kleiner Perkins Caufield & Byers, Sevin Rosen Funds and others.

"Virtualization is still in its infancy,'' said Simon Crosby, chief technology officer of XenSource. "Our objective is to build a strong ecosystem around our code base instead of inventing everything ourselves. It's the only way we can take on a company like VMware.''

XenSource plans a commercial release this summer.

"One reason VMware has been really successful . . . is they have done something that was really, really hard to do,'' said Gordon Haff, an analyst with Illuminata in Nashua, N.H.

The addition of virtualization capabilities into chips from Intel and Advanced Micro Devices will eventually hurt VMware's core business, he said. It will make it easier for companies like XenSource and Virtual Iron, another start-up, to compete.

VMware is not sitting still. To compete with open-source software, it released VMware Server, a free entry-level version of its software. It also is working on a Macintosh version to launch this summer. Greene said VMware's Mac product won't require people to reboot their computers, unlike Apple's Boot Camp software that lets people run both Windows and Mac operating systems on the same machine but requires rebooting.

Greene said the company and its customers are always finding new things to do with VMware's technology.

"It's sort of like a Swiss army knife,'' Greene said. "Once they start using it, they think of other things to do with it.''