The law of unintended consequences can be cruel and merciless. Fixing what ain't broke can be even worse.
I'm not sure in which of those categories we should fit VMware
The software itself is getting mildly positive reviews (learn more about what a virtual machine is and how it enables the cloud-computing trend -- VMware is a leader in these markets) but the new pricing plans are not as popular. In fact, the firestorm of criticism over the new plans can be compared with the outrage over Netflix's
The software guru, majority-owned by storage giant EMC
The previous licensing model encouraged building very large systems with tons of memory and fewer but more powerful processors. Under the new model, it's often cheaper to get more physical servers with less memory instead. Estimates of the costs involved in applying this new structure to systems built with the old pricing in mind range from mildly higher to many times the old expense. The consensus seems to land somewhere around two to three times higher licensing costs, which makes the virtualization software at least as expensive as the hardware it's running on. Ouch!
Is this a big deal?
Well, judging by the public outrage, you'd certainly think so. In reality, I think VMware saw it coming and forged ahead anyway -- after calculating the risks.
Some market watchers see this blunder driving customers into the waiting arms of competitors Microsoft
VMware could certainly change the pricing scheme to appease grumpy customers, but that's probably not going to happen. The company is more likely to drive a hard sell for the new product based on its technical advances and unmatched feature set. For some, there's simply no substitute for the best of the best, which VMware remains with or without boneheaded pricing plans.
I've previously called out Autodesk
In short, I see no reason for VMware investors to panic. Microsoft, Citrix, and friends sure pose a threat to the incumbent king of virtualization, but this war was never fought on a price-sensitive battlefield to begin with. If anything, VMware is justifiably proud of its premium pricing, kind of like a fruit-themed tech company I won't mention here. This strategy has been proven to work.
That being said, VMware is priced for absolute perfection at 107 times trailing earnings and 59 times EBITDA, and there's always a chance that a bold move like this could misfire.
The company is set to report earnings on Tuesday, and we might hear more about the license situation then. If the outrage really is affecting business, management would be crazy not to address it on that very convenient stage. Until then, I'd rather not touch VMware shares with a 10-foot memory stick.
Fool contributor Anders Bylund owns shares of Netflix, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of EMC and Microsoft. Motley Fool newsletter services have recommended buying shares of VMware, Microsoft, and Netflix, as well as buying puts in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.