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VMware: The day after

If VMware ends up getting sucked into its parent, I could only say: You blew it, EMC.

Sorely tempted as I was to do otherwise, I sat on my keyboarding fingers while the VMware saga unfolded yesterday--or at least I limited myself to posting some initial thoughts via Twitter. I know a lot of the personalities involved--I first met ousted VMware CEO Diane Greene in 2000--but I didn't feel I knew enough to discuss what happened in detail. Now, the day after, I don't claim to know exactly what happened within EMC's walls, but I've heard and surmised enough to feel comfortable offering some thoughts.

This wasn't predominantly about financial results. A lot of financial commentators have focused on a 2008 revenue forecast that is "modestly below" previous guidance and a stock price well below once high-flying levels. Come on. The company was still targeting about 50 percent year-over-year revenue growth. It's hardly Diane's fault that investors bid VMware stock up to unsustainable levels. Sure, at some level, financials played into this whole debacle, but only indirectly, insofar as stronger revenue forecasts or a higher market cap may have given Diane a stronger bargaining position.

Nor was this about strategy or execution failure on the part of VMware. One story puts it that: "A carefully considered opinion is that the EMC board doesn't believe Greene is the person who can take VMware to the so-called 'next level.'" Carefully considered perhaps. But I profoundly disagree. If anything, VMware has taken the lead in articulating the value of a software ecosystem that leverages a virtualized foundation but goes way beyond basic hypervisor functions. Perhaps VMware didn't badge it with some vaguely cool-sounding but largely content-free name; they just went with "Virtual Infrastructure." But that's not even a bad thing in a market where many IT shops equate VMware with virtualization. Microsoft has an airy-fairy feel good slogan ("Dynamic IT"), but in looking at all of the process, lifecycle, and other virtues dynamism could lead to, VMware is in many ways uniquely working them, while just about everyone else is mostly talking about them.

How about Microsoft? I've also heard suggestions that this somehow happened because Microsoft was starting to get its virtualization efforts on track. This is supposed to be a surprise? And what was Diane supposed to have done about this, rather than continuing to take virtualization to higher levels and into more functions as VMware has done? Drop a nuke on Redmond? VMware has actually played its hand against Microsoft quite well, leveraging a first-mover advantage rather than milking a lead.

So what's left? All the evidence suggests that Diane's ouster revolved around to what degree VMware would remain independent of EMC. As this Fortune article from last year indicates, this wasn't a new source of friction between VMware and its EMC parent. Writer Adam Lashinsky presciently notes:

The biggest headache just might be EMC. The two companies continue to have as little to do with each other as possible. Greene and her acolytes butt heads frequently with EMC's senior executives, who remain annoyed they cannot benefit more directly from owning VMware by selling its software.

VMware's position is unique among EMC acquisitions. EMC standard operating procedure is to aggressively integrate the companies it acquires, moving employees around and frequently putting EMCers in charge. Not so VMware. After some initial signs that some decision-making and various business processes were being pulled into EMC's Hopkinton headquarters, VMware went right back to operating quite independently out of Palo Alto. VMware even built its own snazzy new eco-friendly headquarters last year.

I have little doubt that this conflict was at least partly personality-driven from both sides. However, our own discussions with key VMware storage, system, and software partners back up Diane's long-held contention that an arms-length relationship between VMware and EMC after the acquisition was absolutely essential to maintaining goodwill and cooperation with those other partners.

Adding to this long-standing conflict was the question of whether VMware would completely spin itself out of EMC. (The earlier IPO was for only about ten percent of the company.) From Steve Lohr of The New York Times:

Ms. Greene was fired after she refused to resign or take another position at VMware, according to a VMware manager who asked not to be named because he was not authorized to speak publicly. The point of conflict, the person said, was that Ms. Greene had been pushing hard for VMware to be spun off early next year. After five years of ownership, a subsidiary can be sold off in an essentially tax-free transaction. EMC bought VMware for $635 million in cash in December 2003.

So, the bottom line seems to be that Diane finally pushed too hard for VMware independence with an EMC organization that, in no small part, has been longing to pull it in more closely. Our understanding is that EMC CEO Joe Tucci was one of the people who actually supported a degree of independence for VMware in the past. However, whatever the individual opinions of EMC execs and its largely-insider board, the deed got done.

And that's very unfortunate for EMC and VMware. I don't really buy Ashlee Vance's calling out of Joe Tucci as the personification of all things EMC in this characteristically snarky Register story, but I reluctantly concur with the rest of his analysis.

That's not to say EMC and new VMware CEO Paul Maritz will rush out and change the way VMware operates overnight. But there's too much evidence of EMC desires to more directly leverage VMware assets and revenue opportunities to believe that we'll continue to see the same sort of hands-off relationship that we saw under Diane Greene's leadership. If VMware becomes just another EMC product, first VMware's partners would be livid, then they would shift their attention toward other virtualization platforms, of which there are an increasing number of options--if none currently as mature and fully-featured as VMware's.

If that happens, I could only say: You blew it, EMC.