VMware IPO puts spotlight on rival firms

The success of VMware Inc.'s public stock offering earlier this month was good news for parent company EMC Corp. of Hopkinton. But VMware competitor John Thibault is almost as glad.

"It's a little awkward to actually be happy for a competitor," Thibault admitted. But his company, Virtual Iron Inc., is riding the wave of free publicity generated by the VMware offering, and by Citrix Systems Inc.'s $500 million purchase of the virtualization software company XenSource the following day.

VMware and XenSource are leaders in the booming market for server virtualization software - programs that let companies get far more work out of the server computers they own.

Virtual Iron, of based in Lowell, is a low-profile upstart in the same business. But Thibault hopes to build his privately held company into an industry giant with cut-rate pricing and a focus on serving small and mid-size companies.

Businesses of every size are adopting virtualization as a way of capping costs and simplifying data management. Server virtualization software lets a company run multiple applications on a single server computer, reducing the number of machines a company must buy. It also treats multiple machines like one big computer, making it easy to move programs from one machine to another, shut down individual computers for maintenance, or add new computers to the data center.

Virtualization isn't just for servers, either. VMware's biggest shareholder, EMC, whose main business is data storage, offers products that virtualize large data arrays, so companies can store their data more efficiently.

And Egenera Inc. of Marlborough builds virtualization hardware and software to manage the communication networks linking corporate servers and storage networks.

When it comes to server virtualization, VMware rules the market, with a 65 percent share, said analyst Laura DiDio of Yankee Group in Boston. Microsoft Corp.'s Windows Virtual Server is in second place, with 29 percent of the market. The giant software firm is expected to become a bigger player in the market when it releases its new virtualization product, Viridian, in 2008. The remaining competitors, like Virtual Iron and XenSource, each have single-digit shares.

But Thibault, Virtual Iron's president and chief executive, said only about 5 percent of the world's servers are currently virtualized. That's why he has no plans to challenge VMware in its core Fortune 500 accounts. "Our target is the new servers that have been purchased, and the customers who have never used virtualization before," Thibault said.

Many of those customers may have been scared off by VMware's prices. Virtual Iron's software sells for about one-fifth the price, Thibault said. VMware's high price is partly because the company created its own virtualization software, as well as the administrative tools needed to manage a virtualized data center.

But Virtual Iron takes advantage of the boom in open-source software, created by hobbyists and academics. Virtual Iron uses Xen, an open-source product available at no charge, as the basis of its product, then adds programs to let users manage their virtualized computing systems. XenSource, the company purchased by Citrix, does the same.

Thibault acknowledges Virtual Iron's software isn't as advanced as VMware's. He said his company's product has "probably about 80 to 85 percent of their capabilities." But he figures that's good enough for the smaller enterprises Virtual Iron is targeting.

Paul Joncas, chief executive of Meganet Communications, an Internet service provider in Fall River, talked to VMware and Virtual Iron before choosing a virtualization system. "I think VMware fits in nicely if you're Gillette," Joncas said. But he said Virtual Iron made more sense for his company, partly because it's locally owned and operated, and because of its lower price.

Virtual Iran has let Joncas consolidate Meganet's servers and shut down dozens of now-redundant computers. "We've put 100 servers into one Virtual Iron array" of just 10 machines. What did he do with the 90 extra computers? "EBay," said Joncas. Meanwhile, his power and cooling bills have fallen by half.

John Humphries, a virtualization analyst for IDC Corp. in Framingham, said Virtual Iron's software is comparable to that offered by VMware. "Virtual Iron has hit on the vast majority of the key functions or capabilities that customers are looking for in a virtualization platform," he said.

But Humphries said most companies are more interested in reliability than in price. "VMware's been around nine, going on 10 years, and what we hear from customers is their stuff just works," he said. "The challenge for Virtual Iron is to prove the same standards of reliability and performance that VMware has."

Thibault said some customers hesitate to buy from a small vendor that relies on open-source software. But he points to Virtual Iron's list of 750 clients as proof his company is gaining the traction it needs to become a leader.

Thibault said he hopes to take Virtual Iron public by 2009, but he's also open to being acquired by a larger company, if the price is right.

"When anybody comes to you with a number that starts with a B," he said, "you need to talk to that person."

Hiawatha Bray can be reached at bray@globe.com.