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Running head: THE CLOUD COMPUTING FORMAT WAR: VMWARE VS. MICROSOFT

The Cloud Computing Format War: VMware vs. Microsoft

Ryan Andorfer

October 27th, 2013

THE CLOUD COMPUTING FORMAT WAR: VMWARE VS. MICROSOFT

Executive SummaryA growing number of enterprises have begun to consider how “cloud computing” solutions can provide

their businesses with the opportunity to grow quickly and achieve goals more efficiently than would be

possible with traditional computing methods. Cloud computing is foreign and mysterious to some. On

the simplest level, cloud computing refers to a network of remote computer servers that are hosted on

the Internet. These servers can store and manage data files, and the information in the cloud can be

accessed at any time from any computer. There are several forms of cloud computing, such as public,

private, and a hybrid of the two. The extent to which VMware and Microsoft, two of the biggest players

in this arena, utilize these different forms of computing is at the core of their respective strategies. With

this paper, we seek to discover how Microsoft’s Azure cloud offerings stacks up to VMware vSphere

cloud offerings, and determine who we feel will win “the cloud computing format war.”

Cloud computing was built on virtualization, and over the years, VMware has contributed greatly to

server virtualization, thus hugely impacting the IT industry. In fact, VMware leads the virtualization

market and is the authority when it comes to automating data center operations and managing virtual

machines. However, since VMware has owned the market share with its virtualization offering, it has

been slow to react to the cloud offering.

Microsoft has responded to VMware’s sluggishness by nimbly jumping in with what it has determined to

be the future of cloud computing: the hybrid cloud. Microsoft has restructured its company in order be the

“first mover” when it comes to cloud offerings (Ballmer, 2013, One Microsoft). Microsoft truly wants to define

and “own” the cloud. However, it must keep in mind that the cloud is built on the virtual platform, and

therefore the company will need to be innovative when trying to beat VMware at the game it created.

VMware, while slow at the get-go, has not been idle in this cloud war. VMware has a different definition

of what the cloud is and will be, and it does not feel it is the hybrid form. Its strategy relies on its

reputation in the IT industry, and on the consistently great private cloud it produces. VMware is trying to

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hold onto its current model, while Microsoft is trying to redefine the current market to meet its own

needs.

In this paper we will first break down the industry in which these two companies compete by analyzing the

environment using Porter’s Five Forces. We then will compare VMware and Microsoft’s strategies around

virtualization and the different ways the two companies utilize these technologies. Finally, using two

separate scenarios, we will analyze the race to define “cloud” computing, and the pros and cons of the

fundamentally different strategies that these companies have in place to set the standard of what the

cloud is.

Both Microsoft and VMware are working to help enterprise IT deliver more with less. The great thing

about the competition and open dialogue between the two companies is that customers and the IT

industry have choices and influence when moving the cloud technology industry into the future. As

cloud computing is a relatively new and rapidly evolving field, it remains to be seen who will win this

format war.

What Exactly is Cloud Computing?Cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and

services) that can be rapidly provisioned and released with minimal management effort or service provider interaction. This cloud model promotes availability and is composed of five essential characteristics (On-demand self-service, Broad network access, Resource pooling,

Rapid elasticity, Measured Service). (National Institute for Technology Standards, 2013)

On-demand self-service means that a cloud computing consumer can request cloud capacity at any time

via self-service and have those resources be automatically provisioned. This increases efficiency by

minimizing the amount of human interaction that normally takes place in provisioning and managing

applications and services. Without the need for manual effort, applications and services can be

deployed at “cloud speed.” Self-service enables a consumer of cloud computing to manage their

resources anytime.

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Broad network access means that the cloud compute capacity can be accessed from a wide variety of

devices in a wide variety of ways over a network, often the Internet. Cloud computing users can manage

their resources from virtually anywhere using any device, even mobile devices. This network access

enables integration between the cloud computing platform and other systems.

Resource pooling is the consolidation of computing resources and allocating them to cloud capacity

consumers in a multi-tenant, shared model. Resource pooling reduces Operational Expense (OpEx) by

fully utilizing available hardware resources. Instead of having hundreds of processors sitting idle on

dedicated servers, virtualized instances can be stacked on a smaller number of processors being utilized

to a much higher level. This also reduces Capital Expense (CapEx) by reducing the amount of servers and

OS software that must be acquired. This higher density utilization is even beneficial to the environment

by reducing power and cooling demand.

Rapid elasticity allows a consumer to increase or decrease the amount of cloud capacity that is being

consumed easily and quickly. Rapid elasticity helps you to only use what you need depending on the

demand. That has the same benefits of resource pooling in terms of costs and resource utilization. It

also enables a business to rise to fluctuating demand quickly and easily.

Lastly, the service provided is measured, enabling the service provider to provide an agreed upon level

of service for an agreed upon price with full transparency between provider and consumer. This drives

good financial behavior because tenants will turn off virtual machines when they are not being used to

save costs. It also drives good business behavior when a service provider and consumer have a

contracted level of service and can transparently measure the quality and cost of the service.

Industry AnalysisAs we enter the next era of technology, Microsoft and VMware both face distinct challenges, which can

be outlined using Porter’s Five Forces Model. Michael E. Porter was able to define an industry within a

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framework made up of five aspects plus an additional aspect: risk of entry by potential competitors,

intensity of rivalry, bargaining power of suppliers, and buyers, the closeness of substitutes to an

industry’s products and the power of complement providers (Hill & Jones, 2013, p. 49). In the analysis

of this technology industry, there are a few that hold high importance.

Firstly, barriers to enter this industry are extremely high. In order to provide cloud space and

technology to rent or sell, a company must house physical computers in what is called a data center.

The cost of data centers are large enough that start up companies will more than likely not have the

capital to buy or build one. For example, early in 2013, Microsoft announced its one billion dollar

investment into a data center in Virginia to support cloud service expansion (Hachman, 2013). Microsoft

and VMware are already invested in warehouses full of computers, and the more they can sell their

services the cheaper their overhead costs will become. This demonstrates economies of scale (Hill &

Jones, 2013, p. 51). Additionally, brand loyalty is deeply embedded in this industry. Companies are

committed to technology providers they have worked with previously, because of trust, equipment, and

financial investment. Clients and vendors are familiar with the workings of each other, understand the

opposite party’s needs, are able to deliver the product or service that is asked for, and have established

best practices to do so. They are able to do this through the trial and error of long-term relationships

and the ease of knowing the hardware that is in each client’s facilities. This leads to high customer

switching costs. The customer of a technology company is heavily invested – in terms of dollars,

hardware, time and reliance – in maintaining a beneficial relationship with their provider.

Secondly, there is a huge amount of rivalry among firms already in the industry. At this point, this

industry is arguably somewhere in the embryonic or growth stage in its life cycle (See Figure 1). Because

of this, demand is relatively low and companies are fighting for shares in the small, but growing market.

Additionally, due to the extreme fixed costs mentioned above, profitability is highly dependent on sales

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volume and thus creates a highly competitive environment. Microsoft and VMware have different

approaches in gaining market share and sales. Microsoft is focused on defining standardization across

the industry so clients are able to customize their cloud usage however they want, while VMware

provides all the onsite tools but puts energy and its use toward internal efficiencies. Finally, like entry

costs, exit costs are high. The financial investments in facilities and equipment, and maintenance of

these assets, are part of the binding nature of the technology industry and the reason why rivalry is

elevated.

While the above discussion shows the difficult aspects of the cloud industry, on the other hand,

bargaining power for both buyers and suppliers is very low. Because companies are locked into their

long-term, established relationships with technology providers, they do not have a lot of power in

making decisions. Similarly, the supplies needed for this industry is mainly hardware, which is already a

commodity. Companies like Microsoft and VMware do not care from which supplier they buy the

physical goods necessary to be a cloud servicer – HP, Dell, Chinese companies, etc. all create essentially

the same product for bottomed out prices and thus they have little influence.

The idea of substitute products plays an interesting role in the industry that Microsoft and VMware are

creating and expanding. Both companies are trying to predict where this ever-changing arena is going,

and moving in two different directions. Microsoft is known for offering a hybrid cloud: letting its clients

decide how much, when, where and what to put into cloud storage. They believe that as time passes,

users are going to recognize the ease and convenience of the cloud. VMware, on the other hand,

continues to offer on-site infrastructure technology solutions, but with a cloud-computing component.

The differences in their substitute services and products will be discussed in the strategy portion of this

paper (See Figure 2).

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The technology services industry, specifically cloud computing, seems a difficult industry to enter

despite the low bargaining power of buyers and suppliers. Astronomical fixed costs, highly established

and already competitive firms, and a strong loyalty to currently existing firms in a relatively unexplored

and developing industry are all major deterrents to entering.

Strategy Comparison: VMware vs. Microsoft in the battle for your data center

VMware’s Cloud Computing Strategy: A History of VirtualizationVMware is currently the largest virtualization provider for enterprises accounting for 74% of the market

(Gartner, 2013). They were able to attain this market share by positioning their product as a best of

breed product. In the early days of virtualization most of the product in the market place were not

powerful enough to be used for production applications. VMware, through internal research, figured

out numerous solutions to problems that had stopped wide adoption up until that point. VMware

believes that its current strategy for R&D, targeted research in its core business areas in partnership

with academia, sets it up well to continue expansion in this market (virtualization) and markets that

derive from it:

“We have made, and expect to continue to make, significant investments in research and development (“R&D”). We have assembled an experienced group of developers with system

level, systems management, desktop, mobile devices, security, application development, collaborative applications, networking, storage and open source software expertise. We also

have strong ties to leading academic institutions around the world, and we invest in joint research with academia…Our R&D expenses totaled $999.2 million, $775.1 million, and

$653.0 million in 2012, 2011 and 2010, respectively” (VMware Inc., 2013).

Keeping the Customer BaseVMware, understandably, is keen on maintaining this customer base buying virtualization products from

it.

“We expect to grow our business by building long-term relationships with our customers through the adoption of enterprise license agreements (“ELAs”). ELAs are comprehensive

volume license offerings offered both directly by us and through certain channel partners that provide for multi-year maintenance and support at discounted prices… ELAs enable us to

build long-term relationships with our customers as they commit to our virtual infrastructure solutions in their data centers” (VMware Inc., 2013).

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Given this stance, they are investing in products that help their customers compete with the public

cloud vendors by taking the best practices from them and making them accessible to IT departments.

“The Cloud Infrastructure and Management product group is based upon our flagship virtualization platform, VMware vSphere. VMware vSphere not only decouples the entire software environment from its underlying hardware infrastructure but also enables the

aggregation of multiple servers, storage infrastructures and networks into shared pools of resources that can be delivered dynamically, securely and reliably to applications as needed.

The Cloud Infrastructure and Management group also encompasses the VMware vCloud Suite and various Cloud Management solutions that are optimized to work with vSphere

environments and are designed to simplify and automate management of dynamic cloud infrastructures that enable enterprises to build, manage and automate their own private

clouds” (VMware Inc., 2013).

Managing the Shift in ITDespite best efforts of IT departments, however, the realities involved in the economies of scale in

running data centers means that in the next three years 25% of companies will be operating in a hybrid

cloud scenario (Gartner, 2013). A hybrid cloud scenario is one in which an enterprise has infrastructure

both in house and in a public cloud vendor’s data centers. Given these realities in January of 2013

VMware publically announced that it was shifting its strategic direction to include this scenario:

“In January 2013, we announced a realignment of our strategy to refocus our resources and investments in support of three growth priorities that focus on our core opportunities as a provider of virtualization technologies that simplify IT infrastructure: the software-defined

data center, the hybrid cloud and end-user computing...” (VMware Inc., 2013).

The significance here is that VMware sees hosting in a public cloud, or Infrastructure as a Service (IaaS)

as ancillary to a company’s private cloud hosting. This will allow them to maintain two revenue streams,

one from the IT departments and one from the public cloud vendors who use their virtualization

platform as the basis for their solution. The difficultly here is the “first mover” effect:

“Emerging IT sectors… are frequently subject to a “first mover” effect pursuant to which certain product offerings can rapidly capture a significant portion of market share and

developer attention. Therefore, if competitive product offerings in these sectors gain broad adoption before ours, it may be difficult for us to displace such offerings regardless of the

comparative technical merit, efficacy or cost of our products” (VMware Inc., 2013).

Forming Competitive Alliances to CompeteThe “first mover” effect or advantage is very real because the top two public cloud vendors (Amazon

and Microsoft) already have large customer bases and have been in market since 2006 (Amazon EC2

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Cloud) and 2010 (Windows Azure), so conceivably many of the first mover advantages have already

been gathered by these two companies. These realities have prompted VMware to attempt to develop

alliances with other existing public cloud vendors rather than build its own public cloud hosting:

“For the hybrid cloud we plan to focus on expanding our capabilities with our partners to deliver enterprise-class cloud services that are complementary to private clouds in order to

enhance our customer's flexibility to run applications on and off premise, as they choose on a compatible, high-quality, secure and resilient hybrid cloud platform” (VMware Inc., 2013).

This is an attractive model for VMware because it allows them to avoid having to invest capital in

building data centers. These costs savings are large; in 2013 Microsoft announced that it would be

opening another data center to support its cloud service at the cost of 700 million dollars (Eller, 2013),

and that is just for one data center. Microsoft has invested 15 billion thus far to support its business, and

they plan to expand their data center capacity by 10 times (McNevin, 2013). The cost avoidance then

for VMware in this space is huge.

The model of using partners to host data center capacity is also intriguing from a customer standpoint.

It allows VMware customer’s to essentially ‘go shopping’ for data center capacity and choose whichever

vendor makes the most sense from a financial and risk related viewpoint. If everything works as

planned it should allow these customer’s to avoid being ‘locked in’ to any one public cloud vendor,

giving them the option to ‘move’ their workloads from one vendor to another, placing customers in a

very strong place when it comes time to negotiate prices with their cloud vendors.

Developing a Standard Definition for Cloud Inter-operabilityTo make this ability to shift workloads into and out of public cloud vendors’ data centers, VMware is

trying to define a standard called the Software Defined Data Center or, SDDC. To help them achieve this

goal they have purchased two companies:

“In 2012, we acquired two companies that furthered VMware's SDDC strategy; we acquired Dynamic Ops, a provider of cloud automation solutions that enable provisioning and

management of IT services across heterogeneous environments, and Nicira, a developer of

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software-defined networking and a leader in network virtualization for open source initiatives” (VMware Inc., 2013).

They hope that by defining a standard they will be able to ensure that they have continued revenue

streams from their sales of their flagship product vSphere, the virtualization technology that is at the

core (and required for cloud vendors and the enterprises using them in a hybrid scenario) of its SDDC

definition.

The Risks of Trying To Succeed Though OthersThis strategy, however, is not without its own set of risks. VMware needs to attract public cloud vendors

to adopt their definition and standard in order for this to work. At first blush it would seem that

VMware has been successful in this effort: on their webpage under partners who provide this service,

they have roughly two hundred vendors listed (VMware, 2013). On closer investigation though it turns

out that this listing includes both public cloud vendors who use VMware as a virtualization platform but

are not compatible with their standards for hybrid cloud and those that are compatible. When filtered

to show the cloud providers that have offerings consistent with their hybrid cloud definition the number

shrinks to 10 (VMware, 2013).

The problem is further compacted because out of these 10 none meet many of the standard Compliance

and Qualifications that are needed to ensure the levels of data security required by most enterprises

[HIPPA, ISO18001, etc] (VMWare, 2013). For many companies this lack of security qualifications is a

game stopper, any company that is constrained by HIPPA laws for instance can only have its data in data

centers that are HIPPA certified.

Another challenge facing this strategy is the size and fragmentation level of their cloud partners. Their

largest cloud vendor is Savvis, a Century Link Company which has 843 million dollars invested in data

centers (Savvis, 2013), which, for comparison is roughly 5% the size of Microsoft’s current data center

capacity (a 15 Billion investment) or 10% the size of Amazon who has seven billion dollars invested in

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data centers (Amazon.com, 2013). This is important because there have been numerous cloud vendors

who have gone out of business in the recent past, usually with large impact to the customers who have

workloads running in their data centers. Nirvanix, a cloud vendor with seven years of history in the

market, filed for bankruptcy on October 1st 2013 (Nirvanix, 2013). This was highly unexpected by the

industry and has called into question the stability of many of the smaller cloud vendors. Generally, if a

cloud vendor does not meet a service level objective (part of the contract) you have options, such as

lawsuits, for remediation. The problem, however, is when the vendor goes completely belly up like

Nirvanix. Howard Marks of NetworkWorld cautions, “All a contract does is give you the grounds to sue

the other party if they don't meet their obligations. When the other party can't meet their obligations

and has no money to sue for, the contract is worthless” (Marks, 2013). He goes on to give the following

guidance to potential cloud customers, “Another lesson is that it may be safest to store your data with

the big boys. Google, Amazon and Microsoft… [They] have other businesses to not only support their

cloud storage offerings, but also provide the resources to make your SLAs (service level agreements)

actually enforceable” (Marks, 2013). Key to VMware being able to have success in this arena then will

be its ability to attract some large cloud vendors that customers can bet their data center on.

The Value of a BrandVMware has a veritable ace in the hole, their brand. In the eyes of most enterprise infrastructure

administrators, VMware can do no wrong. To say that they are a trusted company is an

understatement. In their 2012 10-K filings VMware claimed 2.85 billion dollars of goodwill (VMWare

Inc., 2013) and it certainly will be looking to use this goodwill to help its definition of cloud computing

become the accepted standard.

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Microsoft’s Cloud Computing Strategy: The Cloud OS

Microsoft Becomes a Devices and Services Company: One MicrosoftMicrosoft is in a transition to becoming a “devices and services company.” Just look at some of the

recent acquisitions as evidence of this. Yammer, Skype, and now Nokia are all examples of Microsoft’s

change in direction. To facilitate this change to a devices and services company, the engineering teams

have been reorganized into cross-product groups. For example, there is one group at Microsoft now

that builds the hardware for all of Microsoft’s hardware products – Xbox, PC peripherals, PCs like the

Surface, and now phones. There is another group that does Operating Systems across all products.

This organization style is called ‘One Microsoft.’ It helps align the company around a common strategy

instead of creating redundant capabilities and in some cases having competing strategies across product

groups. Historically, Windows Azure was really competing with Windows Server and System Center. A

customer could either choose to operate an application in Windows Azure or on-site with Windows

Server and System Center. Today, One Microsoft is allowing Microsoft to deliver on a single vision for

cloud computing - the Cloud OS – and it addresses many of the challenges to adopting cloud computing

today.

Microsoft’s Take on Cloud ComputingDuring a presentation given at System Center Universe, Travis Wright, a Principal Program Manager at

Microsoft in the Cloud and Data center Management division said the following about Microsoft’s vision

of cloud computing, “Cloud computing is not a location. It is a method of computing” (Wright, 2013).

He continued by saying that Windows Azure, Microsoft’s public cloud offering, is not “The Cloud”

because it is a location outside of an enterprises data center, but because it has the five attributes of

cloud computing (see “What exactly is Cloud Computing?”) defined by The National Institute of

Standards and Technology (NIST). The strategy for Microsoft is, according to Travis, to provide cloud

services such as Azure, Office 365, Dynamics, etc. themselves, and allow (through licensing) other cloud

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service providers to provide the exact same technologies to customer and to enable enterprises (again,

through licensing) to run this same technology in their own data centers if they want. This is Microsoft’s

vision of the “Cloud OS.” One consistent platform for realizing the benefits of cloud computing

regardless of where it is running.

Cloud Computing as a Power GridIn modern times customers get their power from a central supplier of electricity – a service provider for

electricity – and that electricity is bought and sold as a commodity. Some users however still choose to

produce their own energy for various reasons, using things like solar panels, wind turbine or generators.

Some users also choose to have multiple sources (multiple providers or self-supplied with additional

capacity from a provider) for their electricity for reasons such as redundancy, cost or other reasons.

If you consume electricity from a service provider you pay as you go, it is OpEx. You pay as you go,

consuming capacity form a shared pool of infrastructure and that pool is both scalable and elastic (you

don’t worry about there not being enough electricity).

If you produce your own electricity you have a capital investment upfront (buying the solar panels or

generator etc.) and ongoing operational expenses for running and maintaining that equipment. It may

cost you less or more than getting it from your local utility depending on many factors.

This is Microsoft’s vision for Cloud Computing. Their goal is to turn computing power into a commodity

that can be provided from a service provider (cloud vendor) or on-premise data center depending on

your needs. Microsoft wants to be one of the largest service providers but not the only service provider

in this space. This is a key point to its strategy because it gives enterprises the choice of where they

want to consume their compute power and helps them avoid lock-in related to location of consumption.

Microsoft defines this vision in its 10-k filing saying:

“Unique to Microsoft, we continue to design and deliver cloud solutions that allow our customers to use both the cloud and their on-premise assets however best suits their own

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needs. For example, a company can choose to deploy Office or Microsoft Dynamics on- premise, as a cloud service, or a combination of both. With Windows Server 2012, Windows

Azure, and System Center infrastructure, businesses can deploy applications in their own data center, a partner’s data center, or in Microsoft’s data center with common security,

management, and administration across all environments, with the flexibility and scale they desire. These hybrid capabilities allow customers to fully harness the power of the cloud so

they can achieve greater levels of efficiency and tap new areas of growth” (Microsoft, 2013).

Driving Adoption of the Data Center Abstraction LayerMicrosoft’s definition of this common grid for computer power is called the ‘Data Center Abstraction Layer:’

“The data center abstraction layer (DAL) is our work with the industry to provide a common management abstraction for all the resources of a data center to make it simple and easy to

adopt and deploy cloud computing. The DAL is not specific to one operating system; it benefits UNIX cloud-computing efforts every bit as much as Windows…. The DAL uses the existing…

standards-based management stack to manage all the resources of a data center… The DAL is different than other cloud efforts in that it uses - and builds on - proven management stack

technologies, instead of inventing new ones” (Microsoft, 2013).

This is another very important point. The standard definition of the grid that Microsoft is developing is

an open one, which is to say that you don’t have to pay or license it to use it. Of course they will license

products, such as the Windows Azure Pack, to help you facilitate the management of this framework but

conceivably you are not tied to this licensing play to participate. You could create your own

management framework to interact with this system.

So if it is not all about licensing (to be sure, licensing of the management framework around these

standards is important but it seems it is the primary driver), why is Microsoft doing this?

The Costs of Being the Big FishMicrosoft is the second largest data center organization in the world:

“I claim there really are almost no companies in the world, just a handful, that are really investing in scaled public cloud infrastructure. We have something over a million servers in

our data center infrastructure. Google is bigger than we are. Amazon is a little bit smaller. You get Yahoo! and Facebook, and then everybody else is 100,000 units probably or less. So the

number of companies that really understand the network topology, the data center construction, the server requirements to build this public cloud infrastructure is very, very

small” (Ballmer, 2013).

Being this big comes with huge expenses related to data centers. Microsoft has 15 billion dollars

invested in its data centers currently and plans to expand this by 10 fold (McNevin, 2013). This is a huge

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fixed cost investment and Microsoft is trying to figure out how lower it and defray it over as many

product offering as it can. Windows Azure’s largest current customer is Microsoft itself. Microsoft runs

all of its services (Xbox Live, Bing Search, Yammer, Skype, etc.) off of their platform. For Microsoft it

really doesn’t matter if anyone adopts Windows Azure usage because it is already saving them money.

Their goal with expanding its offerings as a service provider is two-fold, expand out the fixed costs of the

data centers to other companies (Public Azure IaaS hosting) and reduce the cost of data center gear by

turning it into a commodity.

How does the data center abstraction layer reduce the cost of data center gear you might ask? By

standardizing how you interface with it. At the moment, the manufacturers of data center equipment

(servers, networking equipment, etc.) all have their own proprietary ways of interfacing with them. This

means that you need to license and manage each of these systems differently, i.e. you get locked into

using their product and transitioning to another vendor’s product is difficult. This allows the equipment

manufacturers to charge a premium price for their products; they are not just commodities. The core

idea of the DAL is that all data center equipment will be able to be managed in the same way. In order

for the hardware vendors to accept this and become commodity vendors there needs to be extreme

pressure put on them. This is where having more and more data center owners accept their definition

helps them. The sheer size of Microsoft alone has been able to drive the initial adoption of this standard

by hardware vendors, but it has been limited to a subset of the hardware that each vendor offers.

Microsoft is betting that as additional cloud vendors come online to this standard the pressure will

increase on these vendors for full adoption, which will give them an even stronger bargaining position

when buying hardware.

Getting Other Cloud Vendors to Adopt the DALJust like VMware’s attempt to define the grid as SDDC, Microsoft’s definition ultimately relies on other

companies adopting it as well. Most of the value propositions to customer’s fail if they only have one

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external vendor to buy their capacity from. This is a very new area for Microsoft (it was released in

General Availability form on 10/18/2013) and at this point they have yet to setup any sort of

marketplace telling customers what other companies have adopted this definition, and would be

compatible with their definition. The next few months should be a very exciting time in this space as

other cloud vendors get their hands on the code Microsoft uses to run its Public Windows Azure

platform. The ultimate question though is: will vendors see enough value in it to adopt it? If they do,

will enterprises trust Microsoft enough to follow?

Business Level StrategiesThe first dimension to discuss when comparing Microsoft and VMware’s strategies is around

virtualization which has become accepted as a standard way of computing in data centers that enables

highly efficient utilization of hardware (VMware 10-K filing). VMware has essentially owned the

marketplace in the virtualization platform, with over 74% of virtualized computing workloads running on

VMware (Gartner, 2013). They have set the standard in virtualization and hence have the competitive

advantage in the marketplace. They are able to charge a premium for their hypervisor to run their

virtualization tool by locking in customers with multiyear contracts at upwards of $10M over three

years. This also provides them a very high barrier to entry as the cost of switching to another company

outweighs the premium that the company charges for their product.

Microsoft, on the other hand, is the cost leader between the two companies. Since VMware has

become the standard, Microsoft has failed to capture market share even though their technology has

caught up to VMware’s vSphere virtualization offering. In fact, Microsoft provides their virtualization

tool for free to incentivize customers to use their product. This strategy has been successful in driving

down the cost of virtualization over the years but has still not been successful in capturing market share.

Because of this, Microsoft has shifted their strategy to looking at substitute technologies that could

move the value creation frontier out and away from VMware.

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This brings us to the second dimension to discuss when comparing Microsoft and VMware strategies.

The race to define “cloud” computing is on and both companies have very different strategies in place to

try to set the standard of what this should look like. So much so that Microsoft has went through an

organizational structure change to pursue a single strategy in this arena to ensure they don’t lose out

again to VMware (Ballmer, 2013, One Microsoft). One Microsoft was established in July 2013 as part of

the strategy to transform Microsoft to a devices and services company. Microsoft has built its own

cloud infrastructure, Windows Azure, out of necessity in order to run its own products and applications.

Xbox Live, Bing and Office 365 all utilize Microsoft’s cloud computing. “Microsoft products and services

are deeply informed by our first-hand experience running enormous data centers and some of the

largest Internet-scale services in the world (Xbox Live, Bing, Office 365) that serve over 1 billion

customers and 20 million businesses around the world” (Why Microsoft, 2013). Microsoft is now looking

to leverage their cloud-based services externally to go beyond virtualization and allow businesses to

choose whether to shift some of their assets – that have historically been housed on-premise – to the

cloud.

This hybrid offering can offer great efficiencies and savings to customers that are willing to make this

shift in the way they store information. Since VMware has owned the market share with their

virtualization offering, they have been slow to react to the cloud offering. The longer they can hold off

on this technology, the longer they can dominate the market in its current state. Since they have not

built the cloud-service infrastructure internally, their strategy has been to acquire companies and form

strategic alliances with companies that have these capabilities. They can then continue to build the

core, virtualization, and integrate the cloud infrastructure to their product offering. Since they own the

market currently, they can leverage their brand loyalty, reputation and experience with their customers.

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ConclusionCloud computing is a difficult industry to enter. There are high costs associated with the industry,

including fixed, exit, and customer switching costs. Besides the cost factor, there is high brand loyalty,

competition, and buyers and suppliers have little bargaining power. On the whole it is not a very

appealing industry to enter. That being said, the way that traditional IT departments work is changing,

and changing rapidly.

A Sr. IT Director at a fortune 500 company said, “Cloud computing as a paradigm is one of the most

powerful shifts in computing for enterprises since the Internet.” Microsoft and VMware recognize this,

and despite the complexities associated with the industry, they are battling to seize the first-mover

advantage and promote their cloud computing offering as the best one in the industry.

Microsoft is the current leader in the arena for this hybrid cloud movement with a large public cloud

offering, and real story for how the hybrid cloud actually works. Don’t count VMware out though; they

are leaning hard on their technical contacts inside of companies to give them time to develop a

competing platform and standard. The question is, will they have time and will it work? The company

that creates the standardized way of facilitating hybrid cloud environments hopes to see the same sort

of returns as Microsoft has seen with its Operating and Office products.

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AppendixFigure 1

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Figure 2

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