VMware’s CEO Pivots to ‘Cloud First’ to Remake Software Maker

When Simone Brunozzi joined VMware Inc. as chief cloud technologist a year ago, the Italian engineer faced one big hurdle: No one knew the company was in the cloud business.

“The biggest challenge I found was awareness of our service -- most customers know the historical VMware,” he said, referring to the company’s virtualization software, which lets clients run multiple workloads on a single computer server.

“Most companies were not aware of the fact that we were doing cloud at all,” said Brunozzi, who spent six years at Amazon.com Inc. Before that, he was a customer of Amazon Web Services, which delivers online computing power and storage.

Pat Gelsinger, VMware’s chief executive officer, is seeking to remake the Palo Alto, California-based company into one that’s “cloud-first.” He’s trying to carve out a bigger piece of the $14.5 billion cloud-infrastructure services market currently led by Amazon Web Services and Microsoft Corp.

The CEO is speeding up new releases and putting some new features into cloud products first. VMware is lining up Google Inc. and other partners to supplement its own services. With companies moving more of their applications into the cloud, Gelsinger is making sure that customers don’t switch off VMware’s market-leading vSphere virtualization software.

Harley-Davidson Inc., the city of Avondale, Arizona, and Outdoor Research LLC have signed up, and other customers are starting to take notice.

Product Update

As part of the initiative, VMware unveiled on Monday the first major update to vSphere in four years. The product includes new cloud features, such as the ability for a vSphere workload running in a corporate data center to tap into the cloud when it needs more computing power -- for example, a shopping site that’s coping with Christmas demand.

“It’s a must-win battle,” said Bill Fathers, senior vice president of VMware’s hybrid cloud business. “If the workload goes to another public cloud provider that isn’t using our technology stack, that’s lost forever.”

VMware also announced today new cloud-networking tools and the company’s own version of the OpenStack free open-software technology for running cloud data centers.

While VMware’s cloud business accounts for about 5 percent of revenue, which was $1.7 billion last quarter, it’s expanding ahead of company forecasts, according to Gelsinger. That means cloud products will reach 10 percent of sales ahead of the company’s 2017 target, the CEO said.

Crowded Field

VMware entered the market later than its Internet-based public-cloud rivals. Amazon began selling cloud services in 2006 and Microsoft in 2010. VMware began selling cloud software that can operate both in corporate data centers and in the public cloud with the release of vCloud Air in 2013.

“They’re new and they’re late to market and it’s a crowded field already,” said Jeremy Duke, an analyst at Synergy Research Group Inc. “Only time will tell if it pays off. They have some pretty big competition and I certainly would not want to compete against IBM or Amazon or Microsoft. It’s going to be a real uphill battle.”

To make up for lost time, Gelsinger hired Fathers and Brunozzi in the past two years, as well as ex-Oracle Corp. WebLogic executive Ajay Patel. VMware also opted for partner-run cloud data centers so they could offer services more quickly and without the costs of building facilities themselves.

“I wish we would have been earlier,” Gelsinger said. Still, he said, there’s plenty of time left because many companies haven’t made their move into the cloud yet. “Five percent of enterprise workloads are running in the cloud. The market in total is embryonic. If this is a baseball game, the national anthem ain’t done yet,” he said.

Public, Private

Since VMware is the dominant player in virtualization software, its cloud executives are betting that customers will choose VMware when they move apps to the cloud. For buyers who want some parts of their data and apps in-house and some in the cloud, VMware says its products are particularly compelling.

“I don’t think any large company is thinking they will choose either public cloud or private -- they are thinking about both,” said Brent Thill, an analyst at UBS AG. ‘When you think about both, you default to VMware and Microsoft. VMware becomes one of only a few choices.’’

In December, Avondale, an 83,000-person city near Phoenix, went live with VMware cloud for a disaster-recovery system to make sure the city has access to critical services in an emergency. Cost and familiarity were the main reasons for choosing the technology, according to Rob Lloyd, the town’s chief information officer.

“VMware is so prevalent and their cloud offering is so integrated with vSphere that our staff’s skillset made it an easy and natural progression,” Lloyd said.

Small Footprint

There’s more for VMware to do. Fathers would like more deals with software vendors to offer their products as a cloud service on VMware. He’d really like a deal with Oracle, with whom VMware is holding talks, he said.

Even with partners owning the actual data centers, the higher volume of cloud revenue is coming at a lower margin and increasing capital costs, Gelsinger said. It’s also changing the traditional pattern of revenue recognition at VMware, pushing out some sales because less revenue gets recognized upfront in these deals. That will reduce sales by 1 percent this year, the company forecast last week.

While VMware is well-positioned in selling virtualization software that’s used in the cloud -- with 49 percent share, the vCloud Air software is far smaller with less than 2 percent of the market, according to Synergy Research.

“We still have a relatively small footprint compared to Amazon, but we want to get there,” said Brunozzi. “We are quite ambitious with our numbers and quite confident we can get there over time.”

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