Monday, July 09, 2007

Intel Invests Heavily in the Future of Operating Systems - VMware

Intel and VMware announced today that Intel Capital is making a $218M pre-IPO investment in VMware. This investment would give Intel a 2.5% ownership stake in VMware, with a board seat, but no real voting rights whatsoever (less than 1%) relative to VMware's parent company, EMC. So why might Intel be making such a significant investment in VMware? I believe it is because Intel plans to influence the outcome of the investment through its X86 distribution chain.

Sales of computers, especially server computers, are currently constrained by the complexity of software. Larry Ellison estimates that for every $1 in license spending for applications customers spend $6 in integration and maintenance expense. Not only is this complexity a drag on new license sales of software, it is also a drag on new sales of servers to run that software. What if a technology existed that could eliminate the drag of integration and maintenance such that customers could spend more money on new applications and servers? Maybe Intel would be interested in seeing such a technology proliferate?

Well, VMware has that technology, and I believe Intel plans to integrate VMware's technology with it's chipsets such that applications can arrive as virtual appliances, attach to the system in a matter of seconds, and then be managed by the application provider as a complete system image instead of being managed by the customer as a set of “lincoln logs” to be assembled in a unique manner each time. With VMware hypervisor technology as the replacement for the bloated, “one size fits all” general purpose operating system, customers can actually take advantage of Moore's law instead of being held back by the lack of installability, maintainability, and portability of software applications.

How many times has the hardware sales rep been stymied in the sale of a hot new machine because the customer absolutely refused to touch the machine that was currently running their ERP/CRM/SCM/(pick your alphabet soup) application? They refused to touch it because once it was installed, configured, and stabilized no one wanted to repeat the hellish process that led to that stability.

Imagine the new world order with the hypervisor embedded at the chipset level as the replacement for the bloated general purpose operating system. You simply hook up power and networking to the new box, and then “vmotion” the system image on the old box over to the new box. And magically you now have X% more processing power, I/O, memory, or whatever you need on that fancy new box. Life doesn't get much better than that for a hardware sales guy or gal.

My bet is that you see Intel pushing their downstream server partners to adopt Intel chipsets that enable VMware hypervisor functionality at the level of the BIOS. Intel and its downstream partners such as IBM, Dell, and HP will develop system management technology along with vendors like Cisco, Symantec, and McAfee that enables “value added” services to also be delivered to the machine without the general purpose operating system getting in their way. You will see these supply chain partners develop virtual appliance catalogs that contain applications that can be added to the system in the same manner that you add songs to your iPod through iTunes. When software ceases to be a drag due to operating system complexity, hardware sales accelerate tremendously. All this for a measly investment of $218M. I think Intel got a great deal.

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At 11:26 PM, Blogger Unknown said...

Excellent blog, Billy. Are you long EMC?
Thanks in advance.

At 11:49 AM, Blogger Unknown said...

very interesting Billy. But where does this leave AMD? And did you see that in VMware's (186 page!) SI filing covering the Intel investment it states that Intel's position as investor and on board will specifically NOT get it better access to more VMWare technical details. EMC, on the other hand, owns a copy of VMware source code for incorporation into its own products.

At 8:25 PM, Blogger Billy Marshall said...

I am long EMC. Since $16. Happy to be there.

AMD will also put a hypervisor close to the hardware, likely in the BIOS. They already have extensions in Pacifica chip set. It will be fun to watch.


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