Welcome to Palo Alto, Virtualization Capital of the World

My in-laws visited my wife and me for the first time since we moved to the 'Valley'.   They are from a Boston suburb and had never been to Silicon Valley or to Stanford or to Palo Alto, where we now live.  My wife and I started to put together an itinerary of the places we should visit and I pondered some local places that could highlight Silicon Valley and Palo Alto, outside of Stanford's beautiful campus.

HP is still headquartered in Palo Alto, only a few miles from where the company was founded in a garage nestled in a lovely residential area.  Outside of HP, Palo Alto is now the breeding grounds for, in my opinion, a lively technology battle; server virtualization.  Palo Alto is the home of VMWare (an EMC subsidiary) and XenSource.  These two companies have different approaches to carving up physical servers and their business models could not be further apart.  VMWare has lived in a competitive-free environment for the past two years generating a premium for their software.  The server and operating system vendors continue to sell VMWare feeding the EMC storage machine with server related revenue.  XenSource, a Kleiner Perkins funded company, continues to march down the same path as Linux, developing free software seeking subscription and services revenue.  The server and operating system vendors have eagerly built XenSource technology into their next generation code as a hedge against VMWare.

With the two distinct business strategies, it appeared these two vendors would compete at a technology level and let software theorists argue about what is better.  However, Peter Levine, a business-savvy executive mostly known for his years at Veritas, recently took the reigns at XenSource.  Soon after being named CEO, Levine quickly learned that XenSource needed to generate revenue from their product.  At Linux World in April, XenSource announced its intention to productize its code and bring it to market in mid-2006.

XenSource has said that its server virtualization product will be less expensive than VMWare bringing the technology to the mass market.  No doubt, XenSource will approach the server and operating system vendors and try to convince them that they have a better mousetrap.  The server and operating system vendors will have an OEM / reseller decision to make.  They could carry two vendors, switch to XenSource (cutting EMC out of the revenue stream), or stick to VMWare.

EMC just reported revenues for Q1 2006 and VMWare revenues were $131M.  Last year, VMWare revenues approached $390M.  XenSource definitely wants to participate in this expanding market opportunity as customers look to consolidate servers improving server resource utilization.  The vendors are headquartered 4 miles apart in Palo Alto and are destined to collide.  Whether it is at OEMs, in customer accounts, or in the line at Starbucks, VMWare and XenSource will compete for mindshare, marketshare and attention.  It will be a very exciting battle to track.

Unfortunately, my in-laws do not care so much about virtual servers so my wife brought them to a virtual restaurant, also known as the supermarket.  They will be sightseeing in the 'baked goods' isle.