How Big Is the Cloud Computing Opportunity?

I bet you've heard all about how cloud computing and virtualization will overthrow the old guard of information technology in the coming years. Microsoft (Nasdaq: MSFT) is allegedly shivering in fear as upstarts like Akamai Technologies (Nasdaq: AKAM), VMware (NYSE: VMW), and Google (Nasdaq: GOOG) turn the concepts that made Microsoft's billions upside down. Dedicated hardware for every application is so last decade, folks.

But just how large is the opportunity before us? Virtualization has been around for a long time -- wouldn't most of the companies that need this fantastic technology already be using it?

From the horse's mouth
Speaking at the Goldman Sachs Technology Conference this week, VMware's senior VP of virtualization and cloud platforms, Ragu Raghuram, shed some light on that vital question.

According to Mr. Raghuram, something like 90% of all functions performed by a dedicated traditional server from Dell (Nasdaq: DELL) or IBM (NYSE: IBM) could easily move to a virtual server. "There are workflows that might require specialized hardware devices and so on, which could be more tricky," he said. "But the regular commercial workloads that they are talking about could pretty easily fit in a much smaller platform on a pure technology basis."

That move makes more efficient use of your hardware resources, reduces the physical footprint of your IT infrastructure in the data center, and even comes with eco-friendly benefits like lower power usage and cooling requirements.

And the IT staff will have an easier time taking care of a handful of physical machines with tons of virtual server installations than tons of machines with parts that break and wear out. I should know -- I've spent six years in the trenches of system administration.

Are we there yet?
So that's the fully realized opportunity: 90% of the old all-hardware market. Server sales were worth $10.7 billion in the third quarter of 2009 according to Gartner, and nearly every one of those 1.9 million machines represents a potential sale for virtualization experts like VMware. And once you sell a software license, there are training and support contracts that help the company milk revenue out of its customers. Don't feel sorry for the clients, though -- virtualization usually leads to direct and indirect cost savings, despite the costs of software and services.

But VMware's customers -- who clearly have taken the important first step of getting into virtualization in the first place -- typically only have 25% of their servers moved into the virtual space. And they're still installing about half of their new hardware as stand-alone machines, with no plans of virtualizing them. Small, nimble customers typically have a higher proportion of virtual servers than elephantine enterprises, but that shouldn't surprise anyone.

In other words, VMware could theoretically more than triple its sales without signing a single new customer, simply by helping existing clients reap the full benefits of a virtual computing strategy.

But wait -- there's more!
VMware isn't the only horse in this race, but its technology is head and shoulders above anything Microsoft or Citrix Systems (Nasdaq: CTXS) can produce. Raghuram compared Microsoft's latest virtual server platform to what VMware had in 2003 or 2004. He pointed out that you need VMware's more advanced platform if you want to make the leap from simply cramming more work into each machine, to managing your data center as a pool of resources that can be reconfigured at the push of a button. That's cloud computing at its finest.

So VMware isn't even done making the most of its existing customers. Even when it has finished there, it can continue to convert the remaining Luddites, while also stealing contracts from Microsoft. Sure sounds like the good kind of Rule Breaker to me.

Did I leave any stone unturned? Fire away with questions in the comment box below, and I'll do my best to fill in any remaining gaps.