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VMware partner profit margins still strong, exec. says

Are VMware partners making money? Company execs at VMworld in San Francisco, Calif.last week said yes,  but not always in the ways you’d expect.

“There are areas of our partner ecosystem where we can quantify that they actually make a lot more money than we do,” according to Brian Byun, VMware’s vice president of global partners and solutions. “Every time we sell a dollar of VMware license revenue you will see some of our partners making several times that because again there is a drag and a refresh effect.”

VMWare itself is shifting its revenue away from its hypervisor technology, which brings in 80% of its revenue today, toward value-added services, company execs said at the conference.

That drag-and-refresh effect has meant that when an infrastructure gets virtualized with VMware technology people buy new servers with up-to-date multicore processors and larger memory configurations.New networks, new processors, new servers and new storage are changing the economics, the technical design and the products customers buy, Byun said.

“Generally partners [earn] $2 to $3 worth of services when they sell one dollar of a VMware license,” Byun said.

According to Byun when a customer selects a virtualization optimized server it’s much more profitable for server partners, who can sell more memory and items like multiple fibre channel interface cards that can cost several thousand dollars.Another trend is that customers have typically moved to a SAN environment, and are increasingly implementing iSCSI storage networks.

“Conservatively, [our] surveys say greater than 60% of VMware business is attached to shared network storage,” Byun said. “VMware estimates that of the amount of storage that has been dragged or attached to VMware deployments are 126,000 Terabytes in 2007,” Byun added.

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VMware is relegating resellers to be service providers while distributors, who offer no value, take the bulk of the product margin. Mr Brian Byun is confused and needs to relook at empowering the resellers and not the distributors.
I have been watching the virtualization software market since VMWare announced their workstation product over 8 years ago. There's little doubt that VMWare has built a solid repuation and a good product offering in this category. On the margin, and sales side however, the pay off idea being pitch has been mostly focused on server consoldation where TCO has eclisped the performance/cost metrics. Now that Microsoft has validated the VM idea by offerning its own virtualization software I would expect VMWare will find itself needing to rely less on the underlaying O/S 'cooperation' with virtualization architecture. While processor support for virtual machines provides way to avoid a Microsoft O/S level lock, a hadware dependent VM solution could prove problematic to market as AMD and Intel continue to slug it out. At this early stage in the Virt market's maturity, margins are still relativly high and will remain so until Microsoft matures their own product offering. I doubt Xen can capture enough market share to seriously erode VMWare's profit margins by aggressive pricing and their best bet appears to be to walk a line between the market leaders VM and Microsoft.
VMware has relegated the resellers as service providers while the distributors take all the margin. VMware needs to to relook at the channel strategy. The distributor are more often than not adding NO value to the resellers and clients