What VMware Didn’t Tell You About Nicira Deal
On this past Monday VMware announced to buy Nicira for $1.26 billion. Congratulations to many of my former VMware colleagues who joined Nicira and will return back to VMware soon.
Overall this deal aligns well with VMware’s newly found vision on software defined data center. You must have read many of similar explanations and comments from various sources including this one from VMware CTO Steve Herrod, and this one by Nicira cofounder and CTO Martin Casado.
All these focused on the technology and vision alignment. As an outsider, I am going to dig down to the bottom for the real motivation for VMware to buy Nicira. The deal is related to technology but not really about technology. I think it’s a fundamental change of overall business strategy at VMware.
Let’s first look at market segmentation for server virtualization. In data center space, there are three distinct segments: SMB, enterprise, service provider, based on the size of the data centers. In the SMB case, you may or may not call datacenters given small size of infrastructure. But increasingly this SMB segment shifts to either Microsoft, or goes directly to hosting/cloud model by service providers. Therefore, the service provider segment becomes more important than ever.
VMware has been strong at enterprise segment, and I expect it will continue to be so in the coming years. However, it has not yet succeeded in attacking service provider market with its leading virtualization suite. Squeezed by low margins or aiming for higher profit, the service providers have never committed to buy VMware for massive deployments while open source alternatives like XEN, KVM are there with high level and easy cloud solutions like OpenStack, CloudStack, etc. Given this, there is not much hope for VMware to grow its footprint in service provider segment with its current offerings.
Thinking differently, VMware took a different approach. Instead of fighting the hypervisors and cloud war, it figured to leverage the new networking technology that glues the free hypervisors even bare-metal servers, and automation technology from DynamicOps that orchestrates data center operations. These two acquisitions indicate that VMware finally acknowledged the challenges of gaining service provider market.
With the mindset change, I think VMware will try to get away from “vSphere everywhere” (remember the “Windows everywhere” from Microsoft?) which has been its guideline for product direction in recent years. It will take a pragmatic and open approach with virtualization in the service provider market, meaning it will support whatever free hypervisors and cloud platforms out there.
Bottom line: Different market needs a different strategy. VMware has figured it out and started to execute on it. It’s also a sign of maturity of VMware as it shifts its focus from technologies to market and customers. Good luck!
Did VMware Pay Too Much?
With a good alignment with long term vision, there are still questions whether VMware paid too much for Nicira. Here is an interesting article by Howie Xu who used to be the engineering director of networking at VMware, and is now the VP Engineering of Big Switch, a competitor to Nicira but more focused on enterprise market. As you can imagine, he is quite happy to see his “house” valuation soaring with his “neighbor’s house” being sold high.