Is Amazon.com Gunning for VMware's Core Business?

Amazon.com made an announcement at the end of May that seems to threaten VMware's core business. What was the announcement, and what does it mean for the two companies?

Jul 1, 2014 at 4:00PM

Over the last year, VMware (NYSE:VMW) has been growing quickly and has been expanding into new markets. The company has a dominant position in its core data center virtualization segment, so it was perhaps only a matter of time before a large player attempted to challenge VMware on the lucrative home front. Seemingly, that's what's happening now, following an announcement that Amazon.com (NASDAQ:AMZN) made at the end of May. What was the announcement about, and what does it mean for the two companies? 

Amazon's move
The announcement by Amazon introduced the AWS Management Portal for vCenter. Basically, this is a plugin for VMware's virtual machine management tool, vCenter, which allows for easy migration of VMware's virtual machines to Amazon's AWS public cloud. According to Amazon, even those VMware users who are new to AWS will be comfortable in this new environment and will be able to quickly start using AWS resources.

Why is this a big deal? For a while now, VMware has touted the "hybrid cloud," a combination of a private IT infrastructure and a public cloud, as one of its fundamental areas of focus. So far, VMware customers wanting a public cloud to complement their on-premises IT could work only with VMware-compatible providers, including VMware itself, which released its own public cloud last August. Amazon's announced tool disrupts VMware's hybrid cloud strategy and allows customers to migrate to AWS. 

VMware's response

Several days after Amazon's announcement, VMware responded through a blog post written by VMware CTO, Chris Wolf, who called Amazon's vCenter plugin an "import tool disguised as hybrid cloud management." According to Wolf, Amazon's tool does not make it easy to migrate virtual machines back from AWS to a private infrastructure, or to migrate to another cloud provider. This will lead to workflows being locked in with Amazon, and will eventually drive up the total cost of ownership.

VMware also took exception to a new version of an online calculator provided by Amazon, which allows users to compare the total cost of ownership of an on-premises environment versus AWS. According to VMware, the calculator makes several biased assumptions that result in AWS appearing more favorable compared to an on-premises VMware setup. VMware performed its own cost calculation for a typical installation and found that an on-premises solution would be 21% cheaper than using AWS. 

Who's chasing whom?

At first sight, it appears that Amazon has cleverly introduced a trojan horse into VMware's own tooling, thanks to which it will gradually sap VMware of business. Since this was done using VMware's public APIs, there's not much VMware can do except write blog posts warning users about the dangers and costs they might one day face if they choose to go with Amazon.

However, there's a deeper issue here that has to do with the future of enterprise IT. Will companies completely embrace the public cloud, or will they want to keep a significant portion of their IT on-premises due to security and privacy concerns?

Amazon, which has dominated the cloud game for a long time, has repeatedly stated that it is in the first camp. But, VMware's vision of a hybrid cloud might be the winner in the end. Gartner estimates that nearly half of large enterprises will have hybrid cloud deployments by 2017, and Microsoft, which certainly knows enterprise, has also focused on the hybrid cloud with its fast-growing Azure platform. 

In conclusion
Amazon's announcement of any easy tool to migrate VMware virtual machines to AWS is seemingly very bad news for VMware. It's not clear, however, how many VMware users will jump at the opportunity, both from a desire to keep critical data on-premises, as well as from a fear of being locked in with Amazon. Time will tell whether Amazon's move was a clever stratagem to poach business from VMware, or whether it was a misreading of how closely enterprise wants to embrace the public cloud.

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Srdjan Bejakovic has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and VMware. The Motley Fool owns shares of Amazon.com, Microsoft, and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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