If you follow tech industry trends, you’ve probably heard of cloud computing, an increasingly popular approach of delivering technology resources over the Internet rather than from on-site computer systems.
Chances are, you’re less familiar with virtualization — the obscure software that makes it all possible.
The concept is simple: rather than having computers run a single business application — and sit idle most of the time — virtualization software divides a system into several “virtual” machines, all running software in parallel.
The technology not only squeezes more work out of each computer, but makes large systems much more flexible, letting data-center techies easily deploy computing horsepower where it’s needed at a moment’s notice.
The approach cuts costs, reducing the amount of hardware, space and energy needed to power up large data centers. Maintaining these flexible systems is easier, too, because managing software and hardware centrally requires less tech support.
The benefits of virtualization have made cloud computing an economical alternative to traditional data centers.
“Without virtualization, there is no cloud,” said Charles King, principal analyst of Pund-IT.
That’s transforming the technology industry and boosting the fortunes of virtualization pioneers such as VMware (NYSE:VMW – News), Citrix Systems (NMS:CTXS), two of the best-performing stocks in IBD’s specialty enterprise software group. As of Friday, the group ranked No. 24 among IBD’s 197 Industry Groups, up from No. 121 three months ago.
Specialty enterprise software represents a small but fast-growing segment of the overall software enterprise market, which according to market research firm Gartner is set to hit $229 billion this year.
As with most software, the segment is a high-margin business. With high upfront development costs but negligible manufacturing and distribution expenses, specialty software companies strive for mass-market appeal. Once developers recoup their initial development costs, additional sales represent pure profit.
Software developers also make money helping customers install and run their software, another high-margin business.
But competition is fierce. Unlike capital-intensive businesses, software companies require no factory, heavy equipment, storefront or inventory to launch. Low barriers to entry mean a constant stream of new competitors looking to out-innovate incumbents.
In addition to the virtualization firms, notable names in the group include CA Technologies (NMS:CA) and Compuware (NMS:CPWR).
All offer infrastructure software to manage data centers.
“Big-iron” mainframe computers began using virtualization in the 1970s, around the time when CA and Compuware were founded.
In the late 1990s, VMware brought the technology to low-cost systems running ordinary Intel (NMS:INTC) chips. VMware has since emerged as the dominant player in virtualization.
Citrix has added a twist to the concept, virtualizing desktop computers. Rather than installing workers’ operating system and applications on hundreds of PCs spread across the globe, companies can use the technology to run PCs from a bank of central servers. Workers, who access their virtual PCs over the Internet, don’t know the difference.
Microsoft (NMS:MSFT) has jumped in with its own virtualization product, HyperV, which it bundles free into Windows Server software packages. Oracle (NMS:ORCL) and Red Hat (NYSE:RHT – News) have launched virtualization products as well.
Meanwhile, CA and Compuware are racing to move beyond their mainframe roots to support virtualization and cloud-computing-enabled data centers. In February, CA said it would buy 3Tera to build services and deploy applications aimed at the cloud-computing market.
And Compuware bought privately held Gomez, Inc. last fall to manage cloud application performance.
Name Of The Game: Innovate. With a fast-moving market and steady influx of new competitors, keeping customers happy with good service and money-saving breakthroughs is vital.
Nearly everyone who runs a corporate computer system is a potential buyer of virtualization software. Companies ramping up their information-technology purchases use the software to manage their sprawling infrastructure; others with limited budgets use it to squeeze more out of their existing systems.
Sales of server-virtualization software are set to grow 14% this year to $1.28 billion, according to a report by Lazard Capital Markets. Sales of software to manage virtual environments will grow 44% in 2010 to $1.88 billion.
Desktop virtualization revenue will rise 184% this year to $847.8 million. Citrix has the edge in this budding market with its XenDesktop product.
VMware is dominant among large enterprises, controlling about 85% of the server virtualization market. Microsoft is favored by small and midsize companies.
Virtualization is seen as “a strategic asset” for enabling cloud computing, and continues to gain momentum, says Lazard analyst Joel Fishbein.
VMware has the early-mover advantage in this market with its vSphere platform and has stayed ahead by adding new features such as data security and disaster recovery, analysts say.
But Citrix is partnering closely with Microsoft to take on VMware in virtualization.
Competition is heating up as companies scramble to adopt virtualization. Before 2009, just 30% of companies used virtualization, says analyst Fishbein. This year, that will double to 60%. Most of the gain is coming from small and midsize customers.
In addition, virtual servers are soon expected to more than double as a percentage of the overall server workload, from 18% today to 48% by 2012.
VMware says it can stay a step ahead of the pack by building new features into its products, says Dan Chu, VMware’s vice president of cloud infrastructure and services.
“We have a large technology lead with what we enable for our customers,” Chu said. “We are several years ahead of what the others are doing.”
Citrix CEO Mark Templeton says his firm’s broadening strategy — offering a variety of products with multiple licensing options and distribution channels — will grow sales.
“What’s going on is a massive shift in how computing gets delivered,” Templeton said. “In an environment that’s changing so dramatically, the highest-risk thing you can do is not act.”
The first virtualization boom stemmed from a shift over the last decade away from big expensive mainframes and minicomputers to massive banks of cheap Intel-powered machines. Virtualization gave these low-cost systems some of the high-end features of their pricier counterparts.
Virtualization software makers are betting on a second wave of growth fueled by the industrywide shift to cloud computing.
Technology managers use virtualization to run cloud computing in their own data centers. And large tech vendors such as Microsoft use the technology for cloud-computing services they sell to customers.
Dividing computers into isolated virtual machines gives cloud service providers the benefits of shared computing resources without the security downsides.
VMware has the early lead in virtualization. But the technology is quickly becoming a commodity as Microsoft and others bundle it into their broader platforms.
“VMware is known as a virtualization company, and Microsoft is a platform company,” said David Greschler, who heads up Microsoft’s virtualization efforts. “Their strategy is to sell virtualization, but our strategy is to make virtualization available as part of a larger platform at no extra cost.”
At the same time, a shift toward a world of cloud-computing services hosted by the likes of Microsoft, Amazon.com (NMS:AMZN) and Google (NMS:GOOG) could lead to fewer companies purchasing virtualization software themselves.
Source: Investor’s Business Daily