The EMC (EMC) announcement in February about spinning out VMware bothered me. At the time I said it kind of felt like the PeopleSoft Momentum spin-out 10 years ago but I couldnâ€™t say why. Now that EMC has filed an S-1, I have a better analogy. The EMC proposition (itâ€™s in the mail to us shareholders they say) reminds me of the way the Boston Celtics let parquet lovers with nothing better to do with their hard-earned (or even inherited) cash buy a piece of â€œthe Green,â€ also about 10 years ago: Ownershipâ€”with no controlâ€”of a dying â€œfranchise.â€
Letâ€™s forget the corporate governance issues outlined in last weekâ€™s EMC SEC filing. The deal is something along the lines of investors can buy 10% of 10% of VMware, but the investment communityâ€™s aggregate share will only be 1% of voting rights because EMC retains a non-public class of shares. And its auditors say VMware has weak internal accounting controls, kind of odd for an almost 10-year-old firm owned outright now for three years by a multi-billion-dollar 28-year-old public company.
The real issue is that virtualization as a separate function may have run its course. Red Hat (RHAT) bundled it into the recent version of its Red Hat Enterprise Linux (RHEL) and Microsoft (MSFT) plans to bundle it into the upcoming server operating software replacing Windows 2003. Thatâ€™s what Microsoftâ€™s acquisition of Softricity in May 2006 was all about. The Red Hat/Microsoft one-two punch at the low end of the market means todayâ€™s separate market for virtualization software may be at its peak right now (at about .3% of total software spend). Itâ€™s kind of the spell checker of our time. Hereâ€™s the kiss of death: thereâ€™s already a standards group for the idea.
Donâ€™t get me wrong. I understand the concept. Working on Multics marketing in the early 1970s, I was there at the beginnings of virtualization that EMC talks about in its SEC filing as if it was ancient history. It goes like this:
- Letâ€™s do for the 25 million x86 servers out there what Multics, VMS, and AOS/VS did for GCOS, VAX, and Eclipse in the 1970s. Admittedly, VMwareâ€™s strength is that it can virtualize multiple operating software brands and the earlier products virtualized only their developersâ€™ own operating software. But given the 30-year-plus maturity of this concept and its inevitable commoditization, the barrier to market entry by competitors is low. VMware says as much in their filing.
- While server virtualization makes sense, I donâ€™t understand why I would want to virtualize my desktop PC and laptop? According to IDC (according to EMC), less than 1% of non-server personal computer devices are virtualized. I am surprised itâ€™s that high. Presumably itâ€™s because I need to mix some Linux desktop applications in with my Windows apps? Or turn my desktop into a server? VMware does have some good associated systems and lifecycle management software but Microsoft, Red Hat, BMC (BMC), and so forth will add that capability to their related products just as fast as virtualization reaches commodity status in the mainline operating systems?
Come on, EMC, spin it out or not. If thereâ€™s hidden value in VMware, give us our dividend quickly for our patience the last three or four years. I donâ€™t think the value is going to be there very long.
(Byron will own .00000000000000003% of VMware when it goes public because of his vast holdings in EMC.)