The server virtualization business is the next big thing in corporate computing as it allows servers to run several programs where before they might have been able to run only one. That allows enterprises to save on hardware costs. The leader in the industry has been VMware (NYSE: VMW), which had its IPO less than a year ago. The company has had red-hot growth rates and is very profitable.
As is true in all things involving software, though, Microsoft (NASDAQ: MSFT) wants a piece of the action [subscription required]. It is about to launch software to compete with VMware. The name of the new product line is Hyper-V.
As VMware gets ready for the challenge from Microsoft, it is forming alliances with IBM (NYSE: IBM), Hewlett-Packard (NYSE: HPQ) and Dell (NASDAQ: DELL) to ship its software pre-installed on some of their servers.
According to The Wall Street Journal, "VMware customers aren't ready to say they will switch, but seem to welcome the competition." Microsoft's new product is bad for VMware no matter how Wall Street wants to slice it. After hitting $125.25 post-IPO, VMW share are now below $59. The company has operating margins of 20% and is still growing at a rapid pace.
Microsoft knows how to enter a market: come in with a good product, tie it to Windows and price the new software to squeeze competitor margins. VMware is in for the fight of its life.
Douglas A McIntyre is an editor at 247wallst.com.
Naked Truth Investing: You should be in or out of the markets, but never on the sidelines
Comfort Zone Investing: Sifting for winners in the financials
For blue chip buyers: 'This too shall pass'
Reader Comments (Page 1 of 1)
2-26-2008 @ 1:26PM
Chris said...
I must be missing something. When was the last time Microsoft entered the market with a good product? More importantly, when was the last time MS entered the market with an original product that actually was profitable? MS launching a virtualization product is just one more example of how MS is now a market follower. The majority of their products are based on copying other successful products on the market or simply creating new versions of their existing software.
I agree that this will be bad for VMWare as their margins will surely be squeezed, as you suggest, but I predict that MS will not be successful in achieving a dominant market position with this product.