Is VMware’s 50 % discount offer a real deal?

It would be going too far to assume that VMware execs would be thrilled if they were to have to pay out on the 50 per cent-off-or-free offer they made this week-but it wouldn’t hurt the company if it did, according to analysts.

“I’m sure they’re already planning for when they miss the first target,” says Liam McGlynn, senior analyst at Enterprise Management Associates. “They’ll say ‘Hey, we actually missed a target and ate the entire services contract; it was one out of X number, but this isn’t a rigged game; we’re serious.’ It’s great marketing.”

In a press release Monday, VMware offered a guarantee that it could deliver to customers a 50 per cent cost savings on server hardware on new projects, provided the customer hires VMware’s Professional Services business unit and follows a prescribed set of best practices.

There is a list of prerequisites, including a requirement that customers sign up for six specific design and implementation services, that projects cover at least 200 physical servers but not more than 750, and that the total cost savings be calculated by VMware according to many of the same cost-saving assumptions laid down in its online total-cost-of-ownership calculator.

VMware virtualization rival Microsoft has its own virtualization calculator, whose assumptions and conclusions differ considerably from VMware’s, and which VMware executives criticized as flawed when it came out last spring.

“The hardware cost savings is why a lot of people are virtualizing in the first place,” says Mark Bowker, analyst at Enterprise Strategy Group, (who also shared a quote approving of the offer in VMware’s press release about it.) “Having VMware’s guarantee behind it just gives customers more confidence. And it helps the data center server administrators, who are often the ones driving these projects, to communicate the potential savings to business managers who might not understand.”

But the details of the VMware’s calculation aren’t the critical part of the deal, McGlynn says.

From VMware’s point of view, the risk is the loss of services revenue on an engagement that makes money anyway from the cost of the software and ongoing services and upgrades, McGlynn says.

“I don’t think it’s the services division that’s making most of the money right now, it’s in the software,” he said. “I’m sure they’ll be able to deliver on the guarantee most of the time-that per centage savings on hardware is certainly in a reasonable range-but it won’t be a disaster if they don’t.”

Overpromising also gives VMware the opportunity to upsell, Bowker said.

“They can go in and not only say they can save 50 per cent on server hardware, but to talk about Stage Manager, Lifecycle Manager and the other products that are supposed to save time on management as well,” Bowker said.

Unfortunately, looking at savings on hardware alone ignores more than just the additional cost of services, McGlynn says. It also ignores the increasingly stringent requirements business managers are putting on IT for a high return on the dollars invested in any project.

And considering the “really, pretty powerful, pretty expensive” quad-processor, high-memory, VMware VI3-compliant servers the offer requires customers to use, the capital costs alone are going to be fairly high, McGlynn said.

“I doubt most companies are going to have servers that powerful laying around, so there will be some capital costs involved,” McGlynn says. “And you have to agree to the six additional services, which aren’t cheap. You might get a 50per cent cost-savings on servers, but then you have to add in the cost of services, and spread that out over 200 servers to see what kind of internal rate of return you’re getting per server,” McGlynn says.

“It doesn’t cost much more in services to virtualize 500 servers than 200, but spreading the services cost out over 500, I don’t know if you’d get the kind of return you need,” McGlynn says. “Projects are stacked up right now, and only the ones with superb internal rates of return are being approved. I’m not convinced this will give the kind of internal rate of return that would justify the project.”

Maybe not, and the lower limit of 200 servers almost certainly makes the offer irrelevant to smaller customers, Bowker said.

Certainly it addresses a relatively small per centage of VMware’s existing user base, though it may be the most profitable group. A survey VMware published in March, of 1,038 customers worldwide, found that 92per cent of ESX users run more than 10 virtual machines, 55 per cent are running more than 50 VMs and 36 per cent are running more than 100.

But the guarantee and ongoing efforts to calculate costs mark changes from VMware’s year-long habit of dismissing capital costs as a major factor in virtualization decisions and dismissing the comparatively low-cost virtualization options from Microsoft as lacking power, sophistication or manageability.

“Microsoft and VMare both realize it’s important to show value, but it’s also a landscape-grabbing game now,” Bowker said. “VMware still has to go out and get customers who haven’t virtualized yet, and Microsoft is doing well with those people this kind of offer can help address those cost concerns.”

A VMware-sponsored cost study from Taneja Group recently pegged the cost of a VMware installation as actually being lower than one based on Hyper-V, because the management time required was lower and the number of virtual servers that could run on a physical host were higher.

“There you’re looking at server density to calculate cost. So VMware did actually address that, which is good,” Bowker said. “But most customers we talk to are only putting about four virtual servers on a physical server because they’re not comfortable with more than that. The math is different at that density level.”