VMware’s AirWatch Acquisition To Enhance Mobility In End-User Computing

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VMware (NYSE:VMW) recently announced a strong set of quarterly results, driven by end-user computing and software-defined data centers in addition to growing adoption of hybrid-cloud solutions among its subscribers. With VMware increasingly facing competition from Microsoft (NASDAQ:MSFT), Oracle (NASDAQ:ORCL) and Citrix in a maturing server virtualization market, the company has expanded its product and service portfolio to include cloud-computing services for enterprises, network virtualization and end-user computing.

Although the acquisition of Desktone helped VMware tap the end-user computing space by offering Desktop-as-a-Service functionality, management believes that mobile-device management (MDM) is a necessary addition to stay relevant in the end-user infrastructure market. [1] A few days before its earnings call, VMware announced that it will acquire mobile device management (MDM) provider, AirWatch, for $1.54 billion to add enterprise-mobile management and security to its offerings in the end-user computing space. [2]

See our complete analysis for VMware here

Why Mobility Is Crucial For End-User Computing

Over the last few years, enterprises have increasingly seen employees bring their personal mobile devices to work and access work-related application and content on these devices. According to Ovum Research, more than half the employees at workplaces in both developed and emerging economies prefer using a single device for both work and personal use – a trend commonly referred to as bring-your-own-device (BYOD). [3] As a result, enterprises require secure content and mobile device management software to keep their data safe. This has opened up a huge opportunity for companies to develop MDM and mobile application management (MAM) software that enables individual users to securely access work-related content and applications from their personal smartphones and tablets. IDC estimates that the mobile enterprise management market will grow at a CAGR of over 30% through 2016 to become a $1.8 billion market. [4]

Competitors In The MDM Domain

Large companies such as BlackBerry (NASDAQ:BBRY), Citrix, VMware, IBM (NYSE:IBM), SAP (NYSE:SAP) and Symantec (NASDAQ:SYMC) have internal divisions that develop MDM software. Additionally, companies such as AirWatch, MobileIron, Fiberlink and Good are MDM-specific players in the market.

In the last few years, BlackBerry has lost hardware market share to Apple and Samsung and witnessed a decline in its subscriber base, with its flagship BlackBerry Messenger (BBM) service losing out to newer messengers such as WhatsApp and WeChat in the consumer market. Consequently, the company has enhanced its focus on BlackBerry Enterprise Service (BES), which includes its MDM software for enterprises. Moving on from its BB-specific focus, the company has introduced cross-platform support for iOS and Android-based devices in the newly launched BES 10. However, BlackBerry’s BES is disadvantaged by the fact that it offers only on-premise deployment, with cloud functionality still in development stage. Additionally, BES also lacks certain network-related features, email encryption, malware detection, firewalls, virtual private network (VPN) on an app level and remote desktop access via personal devices. [5]

Among other competitors, Citrix acquired Zenprise last year and integrated it with its existing MDM software, marketed jointly as XenMobile. Unlike BlackBerry Enterprise Service, XenMobile is compatible across all platforms including iOS, Android, BlackBerry and Windows Mobile and Symbian and can be deployed via cloud or on-premise. In addition, XenMobile offers certain features that aren’t offered by other players; for example, it supports multiple users on a single device, offers a separate PC-integration tool and allows remote desktop access via tablet or smartphone. [5]

Traditionally, MDM software offered by large vendors such as IBM and SAP was more focused on protecting their own content and applications than providing all-round security. [6] This changed when IBM acquired Fiberlink Communications in December of last year to enhance its MDM product line. As a result, IBM’s mobility software, combined with Fiberlink,  now matches up with XenMobile and AirWatch in most features and functionalities offered. [7]

How AirWatch Scales Up End-User Computing For VMware

In 2010, Apple introduced device managing capabilities for the iPhone that enabled third parties to exercise control over the device. It was the first time a smartphone other than a BlackBerry device had the capability to be used as a business device. Since this enabled iPhones (and consequently Android-based devices) to be used for work, it gave a huge opportunity for software companies to develop software that can be sold to large corporations for content protection and management. VMware was one of the companies to develop its own MDM software, but its management recently concluded that the competition was ahead in the “mobile technology race.” [8] While mobile-specific companies were purely focused on improving on the MDM front, VMware was more occupied in other areas – cloud computing and virtualization.

Presently, VMware intends to capture the growing desktop outsourcing market by offering Desktop-as-a-Service (DaaS) functionality in its VMware Horizon Suite. But constantly evolving market trends have increased the requirements for mobility and portability. Not wanting to miss out on the opportunity presented by mobile management, the company has made the decision to acquire AirWatch. The acquisition positions VMware strongly in the mobile-cloud computing space, as AirWatch is one of the market leaders in the domain. The main advantage that VMware now has over competitors in the MDM market is its ability to integrate end-user computing with applications hosted on computers as well as smartphones and tablets. In this niche domain, Citrix remains VMware’s biggest competitor.

With easy-to-integrate MDM solutions and the ability to deploy them over the cloud, VMware is strongly positioned to tap the estimated $1.8 billion mobile-device management market. According to the company, it was “a distant sixth” among other MDM companies, with AirWatch as the leader. [8] According to Reuters, AirWatch generated an estimated $125-$150 million in revenues last year. [9] Using IDC’s estimated market size for MDM, this translates to a market share of 13%-15%.  Since the deal is expected to close late in the first quarter, the acquisition is likely to directly contribute only about $75 million to VMware’s top line in 2014. Even accounting for full year revenues from AirWatch, VMware’s top line will increase by only about 3%. However, it is likely that the integration of AirWatch software with VMware’s existing Horizon Suite results in VMware generating higher overall revenues by gaining more subscribers.

We have a $97 price estimate for VMware, which is slightly higher than the market price.

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Notes:
  1. VMware To Add Mobile Security With AirWatch Deal, Bloomberg, January 2014 []
  2. VMware To Acquire AirWatch, VMware Press Release, January 2014 []
  3. BYOD Research Findings, Logicalis White Paper, December 2012 []
  4. IDC Report On Mobile Enterprise Management Software, IDC Press Release, September 2012 []
  5. MDM Tools Features And Functions Comparison, Computer World, January 2014 [] []
  6. The MDM Landscape, Enterprise In Motion, March 2013 []
  7. MDM Vendor Comparison, AirWatch Product Comparison Sheet, January 2014 []
  8. iPhone’s APIs Led To VMware’s AirWatch Acquisition, WSJ Blog, February 2014 [] []
  9. VMware To Acquire AirWatch, Reuters, January 2014 []
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