Server sprawl wtih the added cost of OS sprawl…

Virtualization has definitely reach revolution status.  This is apparent when you take a look at VMware’s stock price and market cap which has eclipsed the market cap of Ford Motor Company.  What makes the fact that VMware’s market cap is greater than that of Ford Motor Co. insane is that only 10% of VMware is publicly traded – The other 90% is owned by EMC and EMC’s shareholders.  OK – obviously I am not a finance guy but somehow the math is not making sense to me, here is how i see it:

  • VMware is trading a total pool of ~ 383 million shares at a price of ~ $77 which gives them a market cap of ~ $29.5 billion.
  • EMC is trading a total pool of 2.10 billion shares at a price of ~ $19 which gives them a market cap of ~ $40 billion.
  • EMC still owns 90% or VMware so that value should be rolled into the EMC maket cap, right?  Obviously, wrong!  If this were the case based on my calculation EMC would have a market cap of ~ $305 billion.
  • If 100% of VMware were public would that mean that there would be 3.8 billion shares outstanding and would the market cap be 295 billion?
  • Is the stock price inflated because of the limited number of outstanding VMW shares?
  • Should EMC be seeing a greater affect from VMware stock price?

Personally I think the VMware stock is way overvalued based on the indicators that surround this stock but like I said I am not a finance guy so I welcome some additional clarification.

I still standby a prediction that I made in the past, I think that VMware continues to suffer from better technology always wins syndrome, the disease that lead to the demise of Netscape.

VMware and wirtualization have created a new marketplace, I contend that server vendors and Microsoft have suffered no financial impact due to the incredible success of VMware. 

While virtulization may have artificially quelled server sprawl, server vendors are now selling more sophisticated equipment like 16 way boxes and blades which removes some of the comoditization from the server market and provides a way for server vendors to infuse margin back into a marker which was headed nowhere – if you are a server vendor this is goodness.

For a while I wondered why Microsoft was not more aggressively attacking VMware, I now think I have a solid hypothesis.  While VMware represents a new market for Microsoft VMware is also creating a OS sprawl problem which is driving increased operating system sales for Microsoft – if you are Microsoft this is goodness.

In the past end users may have had 1 or 2 test and dev environments now that virtualization has made provisioning so simple they are literally creating hundreds of virtual test and dev environments.  To date if you are Microsoft why would you be overly concerned….  It is also important to note that in my estimation many VMware users will reach pre-virtualization physical server counts not long after virtualizing.  This is due in large part to the ease of provisioning and management associated with virtualization, users are provisioning more VMs more frequently – all representing big wins for OS providers (namely Microsoft), application providers, server providers and VMware.

Now onto the technology…  There is no doubt that VMware has a hypervisor that is far superior to Microsoft but Microsoft will eventually catch-up – what happens once Microsoft begins to offer pricing concessions on the Microsoft OS and applications when running in a virtualized environment with the MS hypervisor vs the VMware hypervisor?  To me this sounds reminiscent of the IE vs. Netscape desktop battle – the inferior technology won that battle.  We also watched it happen with Novell, undoubtedly a better NOS then WindowsNT but how many users made the switch?

One final thought, users buy servers and operating systems to run applications that solve business problems.  One of the biggest problems that Novell faced IMO was the fact that it was a file server and not an application platform.  If I am Microsoft I break out the Netscape and Novell play book and go to work.

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