A Virtual Revolution

New software makes computing cheaper and more efficient -- and accelerates the power shift from sellers to buyers

When it came to technology, First National Bank of Nebraska Inc. (FINN ) had too much of a good thing. The holding company, with 21 banks and 110 branches in the Midwest, had loaded up on gear in the 1990s. It ran online-banking Web sites on 30 Unix servers and handled more than 500 internal applications on 560 small servers running Microsoft Corp.'s (MSFT ) Windows. But since many of the machines handled just one application, the system was woefully inefficient. The bank's techies did the math and discovered that they were using only about 12% of their potential computing power. Senior Vice-President Ken Kucera decided to rip up and start over.

The result is a dramatic illustration of the benefits of a major trend in computing: virtualization. Using IBM (IBM ) technology, Kucera put 60 Web sites on a single mainframe computer he already owned. He ran them on the open-source Linux operating system rather than more expensive mainframe software. With software from upstate VMware Inc., he shifted the other applications to a single cabinet packed with 70 superthin servers running hundreds of applications on Windows and Linux. The shift boosted hardware-utilization rates to about 70% -- and Kucera expects to save $10 million over five years. "It's revolutionary," he says. "It's really good stuff. It paid for itself in a year."

Virtualization has the potential to dramatically change the way corporate computing is done. Traditionally, applications are wedded to specific servers and storage devices. Virtualization technology allows applications and data to be shifted among a group of computers or within an individual computer in ways that make the whole thing perform more smoothly and efficiently. With servers, it lets one physical machine behave like a half-dozen virtual machines, and it also makes it possible to move an application from one machine to another on the fly. Virtualization software is used to make many storage devices, scattered in different locations, behave as one device. And with communications networks, virtualization software can split one network into several tiers: one with the highest security for financial transactions, another with the most speed for video transmissions.

Although the concept isn't new, it's rapidly morphing into a big deal. What's goosing it is the quest for the tech industry's Holy Grail. In the late 1990s, tech leaders envisioned delivering computing to businesses as reliably and simply as electricity. The idea was that companies would be able to outsource their computing and pay for it on a metered basis -- that's why it's known as utility computing. To fulfill this vision, tech outfits started creating virtualization technologies to orchestrate complex interactions. But it turns out that virtualization is useful whether it's used for utility computing or not. Many of those technologies are now coming to market, with competition fiercest in the storage business. "Virtualization is much like the Internet was a decade ago," says analyst Jonathan Eunice of market researcher Illuminata Inc. "It's a tidal wave. There's no stopping it."

Virtualization is a boon to folks who buy and manage computers. Most important, it makes computing cheaper since fewer servers are required to do the same work. It makes things simpler, too, since fewer machines mean less maintenance.

Virtualization has another important benefit for customers: freedom. In the past, makers of computers and operating systems exerted a lot of control over their customers. Once a company bought gear, it often bought more of the same. With virtualization, it's easier to shift from one company's product to another. Baylor College of Medicine just installed a new data storage system that mixes products from Hitachi Ltd. (HIT ) and Network Appliance Inc. (NTAP ) In the future, thanks to virtualization, it will consider buying from other suppliers, too. "You want to have alternatives. It keeps the competitiveness of the industry up and aboveboard," says Mike Layton, Baylor's director for enterprise services.

There are still glitches to be worked out. For one thing, even though virtualization simplifies computing for tech managers, it requires ever-more-sophisticated systems for monitoring and managing their virtual servers and networks. Those programs are still immature. "Virtualization can make life hell for you if you don't have the tools to fix it when things go wrong," warns Hubert Yoshida, Hitachi's chief technology officer.

Unlike many other major technology advances, virtualization won't create a vast new revenue stream for tech suppliers. In fact, since customers need fewer machines to do the same work, makers of servers and storage devices risk seeing their sales volumes shrink -- unless they persuade clients to adopt new uses for computing. Companies at risk include Dell (DELL ), No. 7 in the Info Tech 100 ranking; IBM, No. 44; EMC, No. 57; and Hewlett-Packard (HPQ ).

Startup Surge

But some tech outfits may see only upside. VMware, now a subsidiary of EMC (EMC ), saw its revenues spike 104%, to $80 million, last quarter, fueled by demand for its industry-leading server-virtualization software. And dozens of upstarts are offering packages that help virtualization work -- including Splunk Technology, whose software searches a computing system to diagnose problems, and Cassatt Corp., whose programs help corporate techies manage their vast collections of machines and networks. A wildcard is XenSource, a six-month-old Silicon Valley startup that's developing products based on Xen open-source software. Xen does some of what VMware's core product does, with a big difference: It's free.

For most tech companies, virtualization is an important new ingredient that they need to add to their products to stay in the game. Processor makers Intel Corp. (INTC ), No. 52, and Advanced Micro Devices Inc. (AMD ) are putting virtualization into their chips starting next year so servers can be sliced more easily into several virtual machines. Microsoft, No. 27, which sells a server-virtualization product similar to VMware's, plans to embed basic functions in the server version of its next operating system update, scheduled for release in 2007.

Microsoft denies that it faces a serious challenge from VMware. "This is only disruptive if you don't keep up with technology and add value. If we stood still, we'd be disrupted. But we're investing heavily," says Jeff Price, senior director for Windows server marketing. Microsoft's desktop and server products sell for less than half the price of VMware's products, though VMware's are considered by analysts to be superior.

VMware has another important advantage: Many corporations want to run Linux as an alternative to Windows. VMware accommodates both on an equal footing. Microsoft doesn't support Linux, though it plans to add some support later this year. Current Linux capability matters to companies such as Qualcomm Inc. (QCOM ), which has shifted nearly half of its PC servers to virtualization mode, with 25% of applications running on Linux. "This allows us to bring in Linux to a much greater degree. We can move away from Windows," says Norm Fjeldheim, Qualcomm's chief information officer.

While virtualization isn't going to sweep Corporate America overnight, analysts consider the shift to be inevitable. As CIOs gradually replace their existing servers, many will add virtualization software. So, over the next several years, the tech world will undergo a radical overhaul. Call it the Virtual Revolution. Rather than being some exotic new technology that's hard to explain, this will be the normal way computing gets done.

By Steve Hamm

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