VMware: looking up to the cloud

Add VMware to the list of once-dominant software companies struggling to adapt to the cloud era. VMware mainly sells software to run data centres efficiently, but most of these are on-premises private-data centres, whereas most of the growth in computing is in shared-data centres - the "public cloud."

The majority of VMware's $6bn in revenue comes from sales of vSphere, virtualisation software that makes data centres run more efficiently by allowing several applications to run on the same computer. vSphere has a near 80 per cent market share for on-premises servers, according to Nomura. With such saturation and the limited growth in the on-premises market, VMware must look elsewhere to grow.

One promising area is data centre management software, which VMware sells to one in seven of its vSphere customers. The company has also developed hybrid cloud software that helps companies with on-premises data centres to bridge the gap to the public cloud. But VMware lacks a great product in the public cloud, where the market is dominated by competitors such as Amazon Web Services. The firm's core technology - virtualisation - is also under pressure from competing technologies. A Nomura survey found that one in four respondents had seen vSphere lose business because of competing "container" technology.

Cloud computing could reshape VMware's business model in profound ways. VMware forecasts the transition to the cloud will reduce revenues by about 1 per cent this year because of different software as a service billing model. The company expects revenue growth this year to slow to 11 per cent, its lowest level since the financial crisis. Its market cap is $35bn. Free cash flow fell 16 per cent last year. For now, VMware will still be able to grow, thanks to its dominant position in on-premises data centres. But the world may be changing faster than VMware can keep up.

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