VMware (NYSE:VMW), which is already grappling with slowing growth due to a number of reasons, has one more reason to worry. This week, one of its major rivals, Microsoft (NASDAQ:MSFT) has announced a collaboration with Oracle (NASDAQ:ORCL) (Read Oracle Teams Up With Rivals Microsoft, Salesforce To Boost Growth).
As per the terms of the deal, Microsoft’s Windows Azure cloud-computing service and Hyper-V virtualization software will be supported by Oracle’s Java, Database, Linux and WebLogic Server. The move will improve Microsoft’s public and private cloud offerings vis-a-vis VMware and could present new challenges for the latter. The business environment has weakened in the U.S. in the last couple of months due to budget sequestration even as persistent weakness in the European markets has been weighing on the growth. Dell recently announced that it would cease its VMware-powered public cloud service.
Gartner’s Magic Quadrant report states that virtualization workloads will grow five-fold by 2015, and this is a very large growth opportunity for companies like VMware and Microsoft.  Competition from Microsoft, Citrix, Oracle and more recently Openstack has already taken some market share away from VMware and we expect this trend to continue. However, according to a recent survey, VMware continues to remain the preferred private cloud supplier with Microsoft’s Hyper-V coming in at second place.  Further, open source cloud initiatives like Openstack have not received traction as strong as expected.  VMware still holds about 60% market share among medium-sized companies as well as a decent market share among large companies.
However, the deal could help Microsoft snatch more market share from VMware. While Microsoft has been able to make some in-roads among medium-sized companies, it has not been able to position itself as a replacement to VMware among large companies. Capabilities of its Hyper-V will certainly get endorsed pursuant to the deal. Virtualization Software is the largest division constituting around 90% of the stock value, according to our estimate. Therefore, even a small change in its market share could have a significant impact on our $100 price estimate.Notes:
- Gartner x86 Virtualization Infrastructure Report, Gartner, June 2012 [↩]
- Open Source Cloud Is Failing To Gain Traction: Survey, Channel Biz, May 09 2013 [↩] [↩]