This is a guest post from Robert Mahowald, (@saaspro) Research Director for IDC's SaaS and Cloud Services practice and Gary Chen, Research Manager for IDC's Enterprise Virtualization Software program.
On January 12th, 2010 VMware announced that it has entered into a definitive agreement to acquire all of the intellectual property and technology rights of Zimbra, maker of a collaboration suite (email, contacts, shared calendar, VoIP, and online document authoring), from Yahoo. As part of the deal, which we expect to close in Q1 of 2010, Yahoo retains the right to use some Zimbra technology as part of its hosted email platform. Yahoo snapped up Zimbra in mid-2007 for $350 million, but we estimate Yahoo let Zimbra go for about $100 million, a price that is a slight discount to Zimbra's estimated $105 million 2009 revenue. This acquisition builds on VMware's summer 2009 acquisition of SpringSource, an application development and runtime framework, which gave the VMware some platform-as-a-service (PaaS) capabilities. Now moving higher up the stack into applications, Zimbra will bring software-as-a-service (SaaS) capabilities to VMware's vCloud initiative. As VMWare continues to assemble a portfolio beyond its core business, its aim to reshape its position into a broader technology company is becoming clearer.
We estimates that since its launch in 2007 Zimbra has sold about 15 million paid seats of its Zimbra Collaboration Suite (ZCS), mostly through ISP and portal resellers, and its SaaS delivery, non-proprietary (works with clients like Microsoft Outlook, Apple desktop suite, and Thunderbird) posture, and low price point made it popular for small businesses and universities looking for inexpensive alternatives to Microsoft Exchange and IBM Lotus Notes. During its time inside Yahoo, Zimbra, with its focus on the small and micro-business segments, has had sluggish sales, and its drive into business markets has been far more low-key than Google’s aggressive push into the small and mid-tier buyer segments with Google Apps and Google Docs. But with Zimbra (and SpringSoft before it) VMware is not just blindly breaking into the applications segment, it is executing on a plan to acquire new capability and reshape itself in the eyes of its competitors and customers. Interesting dynamics to watch:
• Platform aspirations: like Salesforce.com, Microsoft, IBM, Intuit, Netsuite, Zoho, and a few others, VMware is starting to assemble the portfolio to deliver Cloud-based platform as a service (PaaS) functionality, with tools for test & development of new objects and applications, and built-in integration and APIs. These other vendors are using the platform tools as an anchor point for customers to build new applications and customizations, and to lure commercial SaaS vendors, and developers, to their platform, in addition to providing a few key applications as proof of concept, like Salesforce.com with its CRM and PRM apps. SpringSource brings the J2EE tools developer tools and Zimbra brings the applications to VMware's burgeoning play in this important new Cloud play.
• Open source leanings: Both SpringSource and Zimbra have open source roots. Zimbra has an open source edition and the server runs on Linux. Using open source removes much of the software licensing issues that arise in a dynamic cloud scenario, which has irked and confused many Microsoft customers.
• Disruptive products: Customers are increasingly voting with their dollars for SaaS-based applications and Cloud infrastructure, for some workloads/ requirements, and both SpringSource and Zimbra took something mature (J2EE-based development, and email/collaboration respectively) and delivered it in a new way which responds to this change in sourcing.
If VMware is going to start selling applications, the choice of ubiquitous email, and Zimbra's suite of Web-native collaboration services, is a logical place to start. But it will take a richer set of applications before VMware can compete with Microsoft's online services, or IBM/Lotus (which scored a big customer win this week in selling its LotusLive suite to Panasonic), or Google (which has had substantial public wins lately, among both state and local government, and business buyers). If VMware is going to succeed with Zimbra or any application for that matter, it must demonstrate that these applications, presumably to be modified for cloud and virtualization, are going to run significantly better and differently than any old VM today. The emerging trend of having more awareness and coordination between the virtual infrastructure and an application is fairly new and the benefits unclear to many customers.
The Zimbra acquisition is clearly a fortifying move against the Microsoft offensive. Over 80% of VMware VMs are running Windows, so clearly Microsoft has the opportunity to begin stealing these VMs over to Hyper-V. VMware has been countering by expanding its value proposition beyond server virtualization, going to the cloud and into the platform and application layers of the stack. This may allow VMware to begin to wean customers off their Microsoft dependency around Windows, and applications such as Exchange. This is also critical as the client virtualization market begins to build. Desktops are even more Windows-reliant than the overall VM market, and loosening the tight bonds between Windows bundled with Hyper-V, and desktop applications, will be a key strategy. Several vendors have tried this and failed miserably in the past, in part because of the Microsoft enterprise licensing regime, and in part because only a handful of vendors can match Microsoft's depth in the IT stack. We expect that the two key market transitions (toward virtualization, and toward SaaS apps and Cloud-based utility consumption) have created an inflection point for vendors like VMware to capitalize, but it will be no easy task. In the meantime, VMware has been very careful to state that Exchange and other applications would continue to be prioritized and optimized to run on vSphere.
Many VMware partners will probably be concerned about VMware competing with them on applications, but we don't believe that the Zimbra acquisition represents a new situation they haven't faced before. Nearly all hypervisor vendors also sell operating systems and applications. Platform vendors over the years have learned to walk the line between promoting and encouraging development on their platform as well as supplying their own higher-level wares, and application partners have learned to play in this environment. One interesting synergy is with Cisco, a very tight partner of VMware as part of the "VCE" (VMware, Cisco, EMC) alliance. Cisco has been building its own collaboration platform, with assets such as WebEx, Jabber, and PostPath (whose value proposition is less about Cloud email and more about on-premise Exchange replacement), and Zimbra could integrate well into that collection.
VMware's acquisition of Zimbra acquisition may baffle many because the synergy between the virtual infrastructure layer and the application layer hasn't been fully defined, and it isn't clear that the combination will be a natural fit for customers, and there doesn't seem a natural overlap between VMware's larger customers, and the micro-to-midsized firms which are the primary users of Cloud apps today. But the potential synergy is there, and VMware will need to shine a light on it to raise awareness and demonstrate clear benefits if it is to succeed in the application space.
