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Microsoft and Others Vying for Desktop Virtualization


Four public companies are working to capitalize on the future of technology.

Bottom Line

As I outlined in Why the Hottest New Tech Solution Will Go Cold, I believe that in its current iteration, VDI is over-hyped and overestimated.

Investors should really be asking the question, "Are there any material net new users of VDI? Or is it just a more expensive technology that's upgrading the TS user base?"

This is particularly relevant for Citrix Systems, for if the VDI market today is mostly upgrading the TS user base, then as Citrix Systems loses a VDI opportunity, it could also be losing XenApp (Terminal Services) seats -- the lion's share of its software revenue base.

On the other hand, I believe that application virtualization (AS) is under-hyped and underestimated, and moreover, has a material opportunity to add net new users as part of the Win 7 migration. Our forecast from Marker Advisors is that most desktops/laptops/netbooks will run some form of virtualization, but the majority will use TS or AS on top of an OEM-provided operating system.

At the end of the day, we don't see the OEM model of O/S distribution being replaced by virtualization, but rather augmented by DV technologies.

As this market plays out, we believe Microsoft, with the help of its partners Citrix Systems and Quest Software, will gain material share. VMware will win in enterprise accounts that are trying to be true to the vSphere platform. However, in the end I expect VMware to have only a small fraction of the overall DV market (if perhaps a healthy percentage of the smaller VDI market).

Citrix Systems is the pure play of the group, and the one that must at least "place" in this race. Either the vendor succeeds in DV and grows its user base beyond XenApp (that is, it needs net new users, not just XenApp users that traded up to XenDesktop), or it will have a faltering enterprise software business.

In this regard, I've heard many Citrix Systems partners characterize the company's assault on DV thus, "[Citrix Systems] has burned its ships on the shores of DV." You have to love that.

However, while we will likely soon see a flurry of renewed energy around the Citrix Systems/Microsoft partnership, inevitably, we see Citrix Systems having to compete with everyone. Yes, including Microsoft. Why?

Because to win, and meet the expectations of the Street, Citrix Systems will have to push its entire integrated suite in competitive deals, which will eventually drive a wedge in its Microsoft VDI partnership. It's already begun. Adding to this complexity is the fact that there is significant overlap in the two vendor's partner/reseller channels; for most of these partners, we'll let you figure out which side of the bread has the butter.

I will elaborate on the interesting (and developing) dynamic of the Microsoft/Citrix Systems/Quest Software partnership/love triangle in a future Minyanville article.
No positions in stocks mentioned.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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