VMware's decision to buy a 5% stake, or $20 million of stock, in hosting company Terremark is a signal of the company's direction on cloud computing: It aims for a piece of the services pie by ensuring its data center products are a bridge to the cloud.
Announced this past fall, VMware Inc.'s vCloud initiative includes more than 200 hosting companies and service-provider partners that it hopes will use its products to connect private- and public-cloud computing infrastructures.
"It's to seed the market," said IDC analyst Gary Chen, on the investment in Terremark Worldwide Inc. "Once they feel they own that space, they'll have a good say in what happens" in the public-cloud market. But first, said Chen, VMware wants to capitalize on its base in data centers. "Their primary goal is transforming data centers into private clouds," said Chen, and then VMware can sell new products that work across private and public infrastructure through a single interface.
VMware is touting vCloud as a painless way for customers already invested in VMware technology to benefit from on-demand compute resources. It is banking on their trust to inveigle customers into using its data center partners. VMware is beta-testing vCloud application programming interfaces and its Virtual Appliance Marketplace that sells preconfigured "virtual appliances." Chen calls the emerging cloud market a natural progression of virtualization and said that VMware needs to show it can compete in an arena it helped create.
Terremark's Enterprise Cloud, which VMware offers through vCloud among other partners, is built on VMware and will work with some vCloud services. Terremark's spokesman Xavier Gonzalez called the investment a show of faith. "It is a show of confidence in our ability to deliver cloud computing," he said.
The investment "indicates where VMware sees the game going, it wants to virtualize private data centers but then make it as seamless as possible to move to cloud-based services," said Matt Rubins, general partner at M/C Venture Partners in Boston. "Amazon is built on Xen and they are not going to get anything off Microsoft, so it makes sense for VMware to empower the hosting ecosystem."
Amazon is built on Xen and they are not going to get anything off Microsoft, so it makes sense for VMware to empower the hosting ecosystem.
Matt Rubins, general partner at M/C Venture Partners in Boston
"It makes a lot of sense," said Trip Chowdhry, a VMware analyst at Global Equities Research. He said VMware needs channels for its new fleet of products but it "has a nonexistent delivery model" for its services. VMware needs to stimulate sales growth and sees opportunity in its current customer base, he added.
"They are in a perilous situation from a growth perspective," said Chowdhry, noting that sales growth is declining. If its stock price, badly hurt in the economic crash of last fall, is to recover, VMware needs to show "from a stock point of view [either] increased sales growth or increased cash flow," he said. Even though cash flow is strong, that's sometimes not enough to spur continual growth, he said.
He said that VMware's purchase of Terremark shows cloud-averse enterprise customers a solid commitment to a solid cloud provider with an international presence.
VMware made substantial data center investments last year, with an 82,000 square foot data center announced in Bangalore, India, and 100,000 square foott leased along the Columbia River in the state of Washington in the U.S. Speculation that new capacity would be used to offer cloud computing resources to VMware customers was brushed aside by VMware, which stated the capacity was for research and development and testing.