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VMware, one of the hotter software companies around, is taking its shot at the Wall Street spotlight.
After three years as a unit of data storage leader EMC, (EMC) VMware filed for its initial public offering late last month. It aims to raise up to $100 million. EMC will retain a majority stake.
VMware, founded in 1998, dominates an emerging field called virtualization. This is a technology that helps companies put more software on servers by creating "virtual" machines within the boxes that run more than one operating system. It's seen as a cost-effective way for companies to get more bang for their computing bucks.
As investors consider the new stock offering, VMware is bracing for more competition in the industry it pioneered.
The biggest threat, says VMware, is Microsoft. (MSFT) The software king is preparing to launch a product that will strike directly at VMware. Another rival is privately held XenSource, which uses open-source software.
"They (VMware) certainly have a head start, but Microsoft and Xen . . . have the potential to take share over the longer term," said Allan Krans, an analyst with Technology Business Research.
VMware sales rose 82% in 2006, a growth rate so high that it likely is prodding some of the competition.
"There are new entrants in the market that are going to be attacking them," said Gordon Haff, an analyst with Illuminata.
There's a lot to attack. VMware has 90% to 95% of the market, says Tom Bittman, an analyst with research firm Gartner. He estimates that Microsoft has 4% to 5% of the market and XenSource less than 1%.
The idea of virtualization is decades old, and it comes out of the huge mainframe world. But VMware has come up with the complex software that lets virtualization work on the mainstream servers that run on Advanced Micro Devices (AMD) and Intel (INTC) chips.
Most of these servers use one operating system to run applications, leaving much of their computing power untapped. With virtualization, users can let separate operating systems run their own applications. It extends a server's capabilities. Bittman says the number of servers worldwide using virtualization is expected to jump to 4 million in 2009 from 540,000 last year.
In the virtualization market, "There's a lot of money and a lot of control at stake," Bittman said.
Both Microsoft and VMware offer entry-level virtualization products for free. Until now, that's about all Microsoft offered to compete against VMware.
VMware's more advanced product, using what's called a hypervisor, is one of its moneymakers. The hypervisor is quicker and more efficient in setting up "virtual machines" than the entry-level products, Haff says.
Microsoft doesn't offer a true hypervisor, analysts say, but plans to release a test version of its Viridian hypervisor in the second half of 2007. Viridian will be a part of its new Windows operating system for severs, code-named Longhorn.
In its IPO filing, VMware acknowledges that some of Microsoft's upcoming products will better compete with VMware's higher-end offerings.
But the company expects its products to stand up against Microsoft's.
"We believe our approach . . . delivers significant flexibility and super economic value," VMware said.
Patrick O'Rourke, senior product manager of Microsoft's Windows server unit, says Viridian will be a solid, flexible offering as well. He says Microsoft continues to refine Viridian to make it work well with other software.
"We think that Viridian will be a very competitive product in the marketplace," he said.
Still, VMware's virtualization product lineup is far larger than that of Microsoft, or anyone.
The company has continued to pour money into research and development to keep its products far ahead of the competition, analysts say. VMware spent 21% of its revenue in 2006 on R&D, compared with 12% for Microsoft.
But overall, Microsoft has resources that few others can match.
"Our customers are looking for more than just . . . tools and gadgets within the technology," said Microsoft's O'Rourke.
XenSource also has solid virtualization offerings, some analysts say.
The company is small, but it's got a big friend: IBM. (IBM) Earlier this year, IBM said it would fold XenSource's technologies into its virtualization portfolio of products running on Intel and AMD servers, and IBM BladeCenter systems.
In addition, Red Hat, (RHT) a distributor of the Linux operating system, said it would incorporate Xen's product in a major upgrade for its key software, Red Hat Enterprise Linux 5.0.
Open source has exploded in popularity in recent years.
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