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ESX 3i hypervisor OEM deal could hurt virtualization software sales

Dell's giving away the ESX 3i hypervisor through an OEM deal. Some VMware partners fear the competition, but others see new services opportunities.

Dell Inc. will include the VMware ESX 3i hypervisor free with its PowerEdge servers, according to a published report -- a move some VMware partners fear will take away virtualization software sales opportunities.

VMware has original equipment manufacturer (OEM) agreements with Dell, Hewlett-Packard Co., IBM and other hardware vendors to embed the ESX 3i, its entry-level hypervisor, in their servers. Those manufacturers are scheduled to begin shipping servers with the VMware ESX 3i hypervisor by mid-April, and Dell will not charge customers extra for including the ESX 3i, according to a VMware executive quoted in the online publication The Inquirer. A Dell spokesman told that the company does not comment on pricing before a product is available.

The plan would put Dell into competition with VMware's value-added resellers (VARs), and it gives customers no incentive to choose a VAR over Dell, said Jaymes Davis, the virtualization practice manager at Entisys Solutions Inc. in Concord, Calif., the 2006 VMware Enterprise Premier Partner of the Year.

"We're going to have diminished returns on licensing sales," Davis said. "Any standard-level deal that we were going to get into is now out the window."

Dell has a long history in direct sales and still faces skepticism about its commitment to the channel, despite launching a formal partner program last year. Meanwhile, complaints about VMware creating channel conflict have also surfaced.

VMware was pretty callous toward their partners over the last few years because they were the only game in town. They burned a lot of bridges in that regard.
Tim Burke
CEO and founderQuest Technology Management

"Dell is not about resellers," Davis said. "Dell is about direct deals primarily."

To successfully compete against Dell, partners should focus on enterprise-level licenses that include Storage VMotion, virtualization management and other features that don't come with the standard-level virtualization software licenses on Dell machines, Davis said.

"That's really our only market strategy," he added. "If not, we'll have to look at other choices."

Compounding the problem, Davis said, is that VMware and Dell cooperate on joint marketing and sales campaigns, which will make it even harder for VARs to sell the VMware ESX 3i hypervisor against Dell. VMware also provides a dedicated alliance manager to work with Dell.

"There's not an alliance manager for every one of us," Davis said. "There's territory managers, and the territory managers are looking out for generating dollars for VMware, or they're looking out for Dell."

Tim Burke, CEO and founder of Quest Technology Management, said VMware has always allowed OEMs to sell its products.

"VMware was pretty callous toward their partners over the last few years because they were the only game in town," he said. "They burned a lot of bridges in that regard."

That is improving as VMware faces more competition in the virtualization software market and needs to rely on its partners more, Burke said. Burke expects his services business -- where Quest and most VARs reap the majority of their profits -- to remain strong.

Steve Kaplan, president of AccessFlow Inc. in Sacramento, Calif. -- winner of the 2007 VMware Rising Star of the Americas award -- agreed. The nature of virtualization software makes those high-level services a necessary purchase for most customers, he said.

"3i is just about worthless on its own," he said.

Kaplan added that he does not feel threatened by Dell's move, and he even thinks it could create more opportunities for VMware partners to sell virtualization software.

"It's going to help the market and get more people with VMware," he said.

That was the main reason VMware went with the OEM strategy for the ESX 3i hypervisor, according to Brian Byun, the company's vice president of global partners and solutions. VMware announced the ESX 3i hypervisor at VMworld in September.

"It should be very easily and readily available," Byun said. "ESX 3i is an entry point for virtualization. If more people use it and our OEMs get it out there more, it means that the channel has a larger customer base."

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