By Charles Forelle
26 August 2004 This article originally appeared in: Wall Street Journal
DIANE GREENE thinks people and companies need more computers.Just not real ones.Ms. Greene is chief executive of VMware Inc., a Palo Alto, Calif., software company whose products chop up the muscle of computer hardware into smalle pieces, so that several "virtual" computers can run side-by-side on a machine that otherwise has just one personality.
VMware's virtual machines are inside corporate-data centers -- fou virtual machines on one big computer server is usually cheaper than four servers -- and on the desktops of tech-savvy users who need more than one operating system, such as Microsoft Corp.'s Windows and its rival Linux.
But Ms. Greene says virtual machines have broader uses on both the desktop and the server. "In five years, we are convinced that everyone is going to be running in virtual machines," Ms. Greene says.
Those machines may be the next big hope for EMC Corp., the data-storage giant that is VMware's parent -- and which made its name selling very real compute hardware. EMC of Hopkinton, Mass., soared in the 1990s with a better version of the cabinets of hard disks that big businesses use to hold data. But the technology collapse stunned EMC, and rivals soon learned how to match its machines, heightening competition and tightening margins for its core hardware.
"I still think we have a good advantage," Chief Executive Joe Tucci says. "But we used to have a huge advantage."
Now EMC is making a major push toward software, which brings potentially greater rewards. Mr. Tucci has long espoused a goal of seeing 30% of the vendor's revenue come from software; EMC is only a few percentage points shy of that target.
EMC's fundamental question, says Frank Gillett, an analyst at Forreste Research, is: "In this world, where disk is getting commoditized and people are trying to use their high-end disk more efficiently, how do we still have a role?"
VMware has a long way to go to be a significant part of the answer. Its revenue of $47 million in the second quarter is a trailing digit in EMC's sales of $1.97 billion, and it remains nestled in a niche. Researcher IDC estimates that the entire virtual-machine market will amount to just $327 million this year. And Microsoft says it is just weeks away from launching its own virtual-server product, which is "absolutely" a threat, says Dan Kusnetzky, an IDC vice president.
EMC's purchase of VMware for $635 million in December engendered much head-scratching because its products are far from EMC's traditional domain. "EMC has not made it clear to me or other analysts what they have in mind," Mr. Gillett says. "My guess is that, honestly, they are still trying to figure it out."
Mr. Tucci and Ms. Greene are cagey about EMC and VMware's plans, other than saying there are links between virtual servers and a related type of storage- virtualization capability in other EMC products. Mr. Tucci says EMC has pretty much left VMware be. Indeed, while EMC announced three large software deals in 2003, VMware seems to have a favored status. The other two companies have been merged into a new EMC software group, but VMware is a wholly owned subsidiary.
Even if the business connections remain thin, EMC appears to have made a "brilliant" investment, says Toni Sacconaghi, an analyst at Sanford C. Bernstein. Mr. Sacconaghi calculates that in December, the average publicly traded software company had a share price that was 3.5 times its expected sales for 2004. He projects that VMware will have sales of $235 million this year. That means EMC snagged the company for 2.7 times sales.
VMware's trick is to fool each operating system on a physical machine into thinking it is talking directly to the hardware, when it really is communicating with VMware. Each virtual machine is essentially a changing file that describes what it is doing at that moment.
This can yield dividends for corporate users. Servers are generally dedicated to one task -- processing e-mail, for example -- and in the era of fast processor chips, their full power often isn't used. Some studies put the average utilization rate on Intel-compatible servers, which VMware works on, at about 15%.
So four or more virtual machines could run on one server with little performance penalty. That means buying fewer servers. Administrators also can create scores of virtual desktop machines for office workers that actually run on centralized servers.
Prudential UK, a unit of London-based insurer Prudential PLC, decided last year to put some call-center and back-office operations in Bombay, in part to cut costs. But Prudential (which is unrelated to the like-named U.S. insurer) realized that computers in Bombay, more than 4,000 miles from London, couldn't maintain a quick-enough connection to the insurer's databases in the home office, says Andy Ruby, head of infrastructure design.
So he left the hardware in Britain. Mr. Ruby set up 800 VMware virtual machines, acting like desktop PCs, running on about 60 servers in Prudential's data center, where they can quickly connect to databases. The Indian workers sit in front of PCs that are essentially empty shells to display the far-away virtual PCs. While the time lag created by the distance is still there, the virtual machines' proximity to the database lessens the effect.
Ms. Greene notes that virtual machines, being mere assemblages of bits, can be created in minutes and accessed by users over a network, or packed onto a finger-sized storage device and carried on an airplane, to be reconstituted on other hardware.
And VMware can even move virtual machines while they are running, a feat Ms. Greene demonstrates to customers by playing a video clip from the film "Spider-Man" and moving the virtual machine from one computer to another. Spidey doesn't miss a beat.
"There's a phenomenally rich universe of things you can do," Ms. Greene says.