What a difference a year makes. After a disappointing conference in 2016, dominated by executives catering to traditional customers more interested in maintaining legacy on-premise infrastructure than building for a cloud services future, VMware has finally gotten cloud religion. VMworld 2017 was a marked contrast to last year's cloud marginalization, foot-dragging and outright denialism where I accused the company of being,
...more intent on keeping existing customers happy with what disruptive innovation theory terms sustaining innovations, rather than breaking new ground that might stem the tide to AWS, Azure, Google, OpenStack and the SaaS products built on top of them. VMware is playing prevent defense, not wide open offense.
This year's about-face was punctuated by a joint keynote appearance by VMware CEO Pat Gelsinger and AWS CEO Andy Jassy that resulted in a palpable increase in energy and excitement throughout the event.
VMware's shift in strategy was apparent shortly after last year's conference when VMware and AWS shocked the technology world by announcing a partnership designed to bring the former's virtualization platform and management stack to Amazon's industry-leading cloud infrastructure. Over the intervening ten months, both parties have maintained radio silence regarding the service details and progress, but all was revealed at VMworld's opening keynote. Indeed, VMware can thank AWS for injecting much of the energy permeating the conference, particularly once attendees saw how seriously AWS itself takes the effort, as evidenced by Jassy's day-one headline presence.
AWS injects cloud credibility to VMware's portfolio
Both companies and their engineers had to overcome significant barriers in creating VMware Cloud on AWS, as uninspiring and awkward a name as we've heard in awhile. Among the technical hurdles, the most notable are the development of a bare metal server instance to host the vSphere, VSAN and NSX stack that AWS can provision on demand and automatically manage and scale using its existing internal software. With a fixed configuration, the VMware cloud is decidedly a scale out environment, but initially can only expand to 16 nodes, all within a single AWS availability zone (AZ).
Although the VC-AWS technology is unique, the business and delivery model is anything but. VMware looks like many other online services, whether Adobe, Box, Netflix or Slack, where AWS provides the systems, network plumbing, facilities and infrastructure management and VMware resells a managed service, owns the customer relationship and provides support. Indeed, the partnership isn't just about hosting VMware's traditional IaaS products, but also being used to deliver a packaged SaaS portfolio called VMware Cloud Services for things like application resource consumption (Discovery), service costs and trends (Cost Insight), infrastructure metrics and analysis (Wavefront) and application security (AppDefense). In both cases, the customer's relationship remains with VMware, not AWS.
AWS may seem like just a wholesaler for VMware in this relationship, however it has much more upside since once VMware users are running on AWS, they have a fast-lane to its higher-level native services like databases, analytics, Lambda functions and machine learning. For AWS, the agreement serves two ends: bootstrapping its efforts to penetrate large enterprises, and paving the way for VMware users to become AWS customers by integrating the two platforms.
The linkage between legacy VMware systems and native AWS services is probably the most valuable and exciting attribute of the partnership. However, it might turn out to be a slippery slope that ends up siphoning off a growing share of VMware business as its customers gain trust in the AWS platform, familiarity with its services and understanding of how to use them to build service-centric, cloud-native applications.
Asked about the risk of AWS cannibalizing its business, Gelsinger told me that he understood the threat, takes it seriously and agrees that it could happen if VMware did nothing more than migrate its software to AWS and didn't build new services that add business value atop AWS. He said the company wouldn't allow such stasis to set in and that everyone should "stay tuned." Given the company's turnabout over the past year, he deserves the benefit of the doubt, but it's swimming in dangerous and unpredictable waters.
Making good on multi cloud strategy
AWS wasn't the only cloud partnership announced at VMworld. The company also revealed that its PaaS spin-out and Dell Technologies sibling, Pivotal has been working with Google Cloud to create an on-premises container service compatible with Google Container Engine (GKE) that can be combined to create a hybrid environment for containerized applications. Like GKE, Pivotal Container Service (PKS) uses Kubernetes for cluster management and workload scheduling, but is built on a VMware platform, using vSphere for VMs, VSAN for storage and NSX for virtual networking. From that foundation, Pivotal layers its Cloud Foundry PaaS using the BOSH workload deployment engine with the new Kubo module for managing Kubernetes clusters. Indeed, PKS is the commercial embodiment of the open source Kubo project.
Like the AWS partnership, the most significant aspects of an integrated PKS-GKE hybrid environment is workload portability between on-prem and public container clusters with convenient access to native Google Cloud services including BigQuery, BigTable, Spanner, Storage, Vision API, Speech API, Translate API and others. As Google's blog puts it,
One of the key features of PKS is release-level synchronization with Google Container Engine (GKE), ensuring that PKS is always on the same Kubernetes release as Container Engine. Release-level synchronization lets developers and operators build their applications for on-premises or public cloud targets without having to worry about platform drift or compatibility.
Although such seamless access to public cloud services might be considered another Trojan Horse that allows GCP to siphon off VMware business, the risk is considerably less for organizations that have already made the strategic decision to encapsulate legacy systems in containers and use them to deploy custom applications built with Cloud Foundry. Indeed, IDC expects that even in 2020, more than half of deployed containers will be for traditional apps. The firm's research shows that the number of containers in use is about evenly split between public and private infrastructure, and that although the share on public cloud will grow to 62% by 2020, customers want a hybrid container design with the ability to deploy on-premise.
VMware results show steady growth
Notwithstanding my objections to VMware's prior insularity by catering to IT careerists often guilty of protecting established fiefdoms at the expense of business competitiveness, the company has been on a financial roll. In its most recent quarter, VMware grew revenues 9% annually and more than 12% over the same quarter last year, with net income spiking 26% year-over-year. Over the past five-plus years, the company has steadily grown annualized revenue at an 11.9% CAGR, with no sign of deceleration, so the management is clearly doing something right. Although it's namesake server virtualization product has saturated the market, new products like the NSX network virtualization platform and VSAN virtual storage are fueling growth. Over the past year, VMware has logged an 85% increase in the number of NSX customers, albeit off a small base to just 2,600 total, and a 150% growth in VSAN buyers, to 8,000 total.
Gelsinger told Wall Street analysts that he's very encouraged by the macro environment for IT companies, where so-called digital transformation, i.e. the automation of business processes and the simultaneous push to enable more efficient employee workflows and direct consumer interactions via mobile apps, are fueling new technology spending. On the company's recent earnings call, Gelsinger said,
... Every business is becoming a tech business, every element of every business is becoming a tech business. This idea of digital transformation is, we believe ushering in a broadening of the role of technology. So I believe that this is overall a period of accelerating growth for technology companies broadly. And I think companies that are well-positioned for that are going to benefit by a good tailwind of tech growth in a broader sense. We believe that VMware with our cloud offerings, our software driven offerings is uniquely positioned to benefit from many of those trends.
VMware has consistently shown that it can add features to its core platform that its customers will pay for.
However my concern was that those traditional IT infrastructure buyers are not in the driver's seat as business-level technology decisions push CIOs to reduce cost, particularly CapEx and move to more agile, efficient and adaptable cloud services, both IaaS and SaaS.
With its new partnerships involving the three largest cloud providers, VMware finally acknowledges that it must adapt to a multi-cloud world where its on-premise infrastructure isn't necessarily the epicenter of an organization's IT strategy. Admittedly, VMware's core customers won't be jettisoning it for AWS, Azure or Google Cloud anytime soon, but the company sees that it can no longer expect exclusive ownership of their infrastructure estate.
VMware has entered a fluid and disruptive era for application platforms by learning that there's more to be gained by building products that add value to other cloud services than fighting them in a death march. With many of its products now operating above the infrastructure layer, VMware is on a path to becoming a cloud-agnostic software provider in the mold of SAP. As Gelsinger put it in VMware's last earning's call,
Cross cloud services will expand our hybrid cloud strategy to enable our customers to run, manage, secure and connect all their applications across all clouds and all devices, regardless of whether the underlying infrastructure is VMware based.
It's a solid strategy and, based on some private conversations with a couple of VMware execs, a significant side benefit of the new blood the company injected through its many acquisitions over the past few years. The cloud-first mindset of sharp, entrepreneurial and yes, younger leaders the company inherited apparently sparked some heated internal battles between the business protectionists and the technological realists. Fortunately for VMware, cloud denialism and protectionism finally lost and the company is on a solid course to cloud-era success. Call it VMware 2.0, and I'm excited to see where it leads.