Market pressures force VMware to reconsider vCHS pricing model

Major IaaS providers offer pay-per-use pricing and VMware has to follow suit to remain competitive.

The cloud is changing the way enterprises pay for IT infrastructure, and for VMware to remain competitive it must expand beyond a subscription model, according to analysts.

VMware plans to offer a pay-as-you-go service for its vCloud Hybrid Service (vCHS) in the second half of the year, according to a response by the company's hybrid cloud team during a recent Reddit Ask Me Anything (AMA) discussion.

"This service will include billing in arrears based on actual resource consumption," the company response read. "Granularity will be by the minute and will be aggregated across all resources consumed [not per VM]."

VMware at one point was the company that led the way and everyone else would follow suit. Now they've gone from a leader category to a follower category.

Eugene Alfaro,
CTO, Cornerstone Technologies

VMware's vCHS infrastructure as a service (IaaS) became generally available in August 2013. So far the service is only offered on a fixed-cost basis, but with leaders in the cloud market offering payment structures that only charge for what enterprises use, the choice for legacy vendors such as VMware becomes obvious, analysts say.

"If they had their choice they probably wouldn't be doing it, but they're meeting the needs of the market," said David Linthicum, senior vice president with Cloud Technology Partners, a Boston-based consulting firm.

VMware held out as long as it could, a mistake that leaves the vendor playing catch up, Linthicum said. He suspects there's less of a margin with pay-per-use vCHS pricing and the move will disrupt the company's accounting and reporting at first, but the market has changed and customer expectations have changed with it.

Despite the AMA comment, VMware hasn't formally announced any specific pay-as-you-go vCHS pricing plans and a company spokesperson declined to comment further.

The move is an indication VMware has struggled to gain traction in the cloud, according to Eugene Alfaro, CTO of Cornerstone Technologies, LLC, a Campbell, California-based VMware enterprise partner.

"It's opening it up for customers who want to purchase new functionality in the vCloud service and other offerings that would allow them to touch it, feel it, see it, but not be commit to it," Alfaro said. "That tells me they're having a tough time to get customers to buy in."

This is a new territory for VMware, which had been able to get its server virtualization customers to lock into contracts and allow the vendor to dictate prices and pricing structures, Alfaro said.

"The model has been set by Rackspace and Azure and all the other IaaS providers," Alfaro said. "VMware at one point was the company that led the way and everyone else would follow suit. Now they've gone from a leader category to a follower category."

VMware faces some particular challenges in the public cloud that make this move necessary, according to Lydia Leong, an analyst with Gartner. The company's current model offers a fairly high financial barrier for entry, while the major champions for its products are IT pros that aren't typically champions for the cloud.

"The major drivers of enterprise purchasing of IaaS is the enterprise architect, and the enterprise architect tends to be pushing more toward AWS," Leong said.

Gartner's Magic Quadrant for IaaS, released last month, put VMware toward the bottom of the listed vendors in terms of completeness of vision and ability to execute. And while the company's place as a leader in the virtualization market remains unquestioned, observers are unsure where it fits in the public cloud market.

But others have faith in VMware's long-term vision.

A move to pay-per-use is consistent with the direction of the EMC Federation -- a partnership between EMC II, its research division RSA, Pivotal Software Inc. and VMware, according to Matt Healey, analyst with TBR. VMware began evolving its strategy over the past six months as it seeks to standardize the hybrid cloud model that creates less of a barrier for new users and forces these companies to integrate what customers are doing.

"I'm very bullish on what VMware and EMC and the EMC Federation is doing," Healey said. "I would expect going forward from VMware, Pivotal and other hybrid cloud offerings you're going to see a lot more pay-per-use."

And while Amazon is the clear leader in the IaaS space, VMware's key competition will come from the likes of Microsoft with value-added service on top of the compute time and storage, Healey said. That means its value in pay-per-use has to at least be in alignment with Amazon, but not necessarily its pricing.

"As long as they can demonstrate better value, higher pricing per se isn't necessarily a problem," Healey said. "It's only a problem when higher pricing equates to lower value."

Trevor Jones is the news writer for SearchCloudComputing. You can reach him at tjones@techtarget.com.

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