Microsoft Launches an Attack on VMware

Microsoft (Nasdaq: MSFT  ) does not like to play second fiddle.

After watching the market for virtual server software grow under the tutelage of market leader VMware (NYSE: VMW  ) over the past few years, Mr. Softy has launched a full frontal assault on the smaller rival's stronghold.

In a marketing blitz that few companies can perform with equal panache, Microsoft is touting improvements in its own virtualization packages as well as heralding a tighter hookup with Citrix Systems (Nasdaq: CTXS  ) and its Xen line of products. There's even a tool under development that will let you move server images back and forth between Microsoft and Xen virtual server environments like nobody's business.

What about me?
VMware support doesn't figure into this equation, though. Not directly. Instead, Microsoft is building VMware controls into its proprietary virtual machine manager because it thinks it can do a better job of managing VMware instances than VMware itself.

The opportunity in the virtual space is obvious to all players involved. Bob Muglia, Redmond's senior VP of server software, estimates, "Less than 5 % of companies are utilizing virtualization technology because it is simply too cost-prohibitive and complex." VMware would scoff at that suggestion and fire back with a 100% adoption rate among Fortune 100 companies and a customer list that's 20,000 lines long.

VMware can also boast of $1.1 billion in trailing revenues, while Citrix only hopes to pull in $50 million next year from Xen sales. Microsoft is mum on Virtual Server sales, but we can assume that it ain't much today.

The new dynamic duo is starting from a considerable disadvantage, in other words -- but shipping built-in virtualization with server editions of Windows could even the playing field quickly. My money would still be on the proven VMware platform until Microsoft can walk the talk and show us some big customer contracts.

This kind of attack is long overdue. The house that Bill Gates built has never been among the preferred partners that VMware likes to show off. We're talking about software that should be right in Mr. Softy's wheelhouse, but it's looking more like a strikeout than a home run right now.

What's next?
The race to the top is far from won. Several high-profile VMware partners -- Hewlett-Packard (NYSE: HPQ  ) , Cisco (Nasdaq: CSCO  ) , and Dell (Nasdaq: DELL  ) -- have thrown support behind Xen as well, so they're clearly not sure where the ball will land. Mind you, these companies have more visibility in technology trends than any simple Fool on Main Street could ever hope for.

As an investor, I'm tempted to look at virtualization as a two-horse race between Citrix and VMware, with Microsoft playing a supporting role. After all, it would take a massive hit to move the needle very far on one of the biggest companies on the planet, while the other two options are smaller and more focused racers.

There's a reason The Motley Fool's Rule Breakers newsletter service pretty much disowns any large-cap company and most of the mid-caps -- it's so much easier to double or triple VMware's $171 million trailing profit than Microsoft's nearly $15 billion. That choice does come with some risk, but those who give up a little opportunity to purchase safety surely deserve neither, with apologies to Benjamin Franklin. If VMware were smaller, it would feel right at home in that newsletter.

But on the bright side, it's big enough and successful enough to scare mighty Microsoft into action, and that's saying something.

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