“Why would a virtualization vendor acquire a messaging provider?” asked a customer of ours last week when the rumors started. With the deal now official, we have answers from both VMware and Zimbra, but as I tend to think there’s more to it than “adding to the portfolio of partners,” I thought I’d take the time to answer a few questions on the deal for all of you.
Q: Before we begin, anything to disclose?
A: Definitely. Neither VMware nor Zimbra are current RedMonk customers, though we know people with both firms well. Competitors of the two, on the other hand, including IBM and Microsoft are current RedMonk customers.
Q: Now, for those that missed it, can you rehash the announcement?
A: Yesterday, VMware announced that it had entered into the proverbial “definitive agreement” to aquire Zimbra, an open source messaging and collaboration provider, from Yahoo. The deal was expected to close in Q1 of 2010. Yahoo, remember, had previously acquired Zimbra in September of 2007 for $350 million dollars.
Q: Were the financial terms disclosed?
A: They were not, but AllThingsDigital’s Kara Swisher reported that the transaction price, while over $100M, would be shy of the $350M Yahoo paid three years ago?
Q: So is this merely a buy low opportunity for VMware?
A: I’m sure that’s a component of the decision, because even at a $350M valuation they would be acquiring it at a discount considering that $350M two years ago is worth morth than $350 million today, and that’s without taking into account the fact that Zimbra’s paid accounts have balooned to 55M (according to VMware – they were ~44M back in April) since the transaction. But to answer the question, no, there’s a lot more to it than buying low.
Q: What then is the primary motivation for the transaction?
A: An analyst colleague, Forrester’s Ted Schadler, in a piece for ZDNet, says “it’s about the seats, and I think that’s partially correct. It’s about the seats, yes, but really it’s about who’s controlling those seats. Zimbra’s strength from an account perspective has always been service provider types; it’s not clear what percentage of the tens of millions of seats are sold through the likes of Comcast and NTT Communications, but it’s safe to assume that it’s substantial. Which are, not coincidentally, precisely the type of customers VMware needs to realize its lofty cloud ambitions.
Q: How does Zimbra help?
A: Well, put yourself in VMware’s shoes. You effectively own the still growing virtualization market, but growth is far from assured due to the commoditization of the virtualization technologies at the low end, the sublimation of virtualization into the operating system (e.g. RHEL, Windows, etc) at the high end, and the increasing attention virtualization management is receiving from the high end IT management players – remember this ad? So what do you do? You look for opportunities for growth. Expanding your footprint, and thus your share of enterprise dollars, as VMware did previously with SpringSource – and as Red Hat did with JBoss before them – is a good place to start. But considering that Maritz is a Microsoft veteran, you have to assume he’s thinking bigger than incremental, sustained growth. He knows, first hand, that true margin comes not from platform success, but from platform dominance.
In spite of their best efforts, however, VMware has yet to totally disintermediate the operating system – and thus own the platform – for the general server market. True, VMware’s share is massive and everyone’s got tons of Linux and Windows running on top of VMware, but the operating system providers still exert control by virtue of their status as ISV target.
What if, however, there were a market where the operating system was already highly abstracted? Where, in some cases, it was completely obscured via the frameworks layered on top of it – frameworks we now call Platform-as-a-Service?
Q: So this acquisition is about the cloud?
A: I believe so, yes. Zimbra, by itself, does little to advance these ambitions. Sure, their application portfolio is now that much more complete with the addition of a very credible, open source collaboration platform. But the real key, to me, are the customer relationships Zimbra has established with just the sort of people VMware is going to want to talk to as it looks to own the cloud.
Q: What sorts of people are those?
A: The Comcast kind of people. If I was VMware, the day the acquisition closes I would have my new, joint sales team out talking to every service provider’s CEO about a bleak, dystopian future in which the service providers own nothing, and have been reduced to dumb pipes that exist to shuttle data and workloads from one Amazon datacenter to another owned by Google. I would be asking every application host that Zimbra’s currently working with how they expect to compete with providers like Amazon or Rackspace that can out-innovate them in cloud infrastructure. And I would be telling all of them that we, VMware, can help you.
Q: But is the account access worth better than a hundred million dollars?
A: If it helps advance VMware’s cloud ambitions, which could be core to the future of the company, yes, easily. Because the marginal value of that access is different for VMware than it was for, say, Yahoo, who harbors no such platform ambitions. And besides, it’s not as if Zimbra’s unable to sell the product; quite the contrary, from all accounts. So the initial cash outlay could and should be easily offset by the improved sales that will naturally result from having an established direct sales force.
Q: And there’s the Java angle…
A: Indeed. VMware’s an enterprise technology vendor, enterprises prefer and subsequently advantage Java, hence the Java bet on SpringSource. Zimbra fits, in that respect, both from an internal resourcing standpoint and in terms of its external customer messaging. Which is not to say that VMware would not have acquired Zimbra if it was written in, say, PHP. But the acquisition logistics and hurdles would have been more significant, certainly.
Q: What does this acquisition mean for customers?
A: James thinks it’s good for them – he even found a happy one on Twitter – and I mostly agree. While Zimbra made sense as a Yahoo technology acquisition, it was never a good fit for the established business model. As is amply demonstrated by Yahoo’s lack of commitment to the direct sales resources necessary to competing effectively in an ever more competitive collaboration market. VMware, whatever else may be said about it, understands the process of selling to and supporting enterprise customers. So from that standpoint, it should be an improvement.
That said, I could see VMware being far more aggressive with pricing than Yahoo ever was, or Zimbra before them. At least in an unbundled fashion; those who purchase virtualization as well are likely to see significant discounting.
Q: Can VMware handle this very different business, or are they likely to be distracted?
A: We’ll see, but I suspect it won’t be a problem. SpringSource, a materially distinct business from VMware’s core virtualization product line, didn’t really force them off message at VMworld this past fall.
Q: How about a question from the audience, one from Karsten Wade: how does the M&A benefit the open communities whose work is bundled in Zimbra?
A: As a company whose relationship with open source – at least prior to the SpringSource acquisition – is complicated, the Magic 8-Ball says “Ask again later.” At the very least, the projects could benefit from potentially wider exposure (I’m referring to pieces like nginx and Sieve, clearly, rather than MySQL), and it’s probably beneficial that they are in markets not material to VMware but very much so to some of its competitors.
Q: Is there a play for VMware parent EMC in this acquisition?
A: Possibly, though EMC has traditionally done an admirable job of being hands off with its virtualization wunderkind. Zimbra, while optimized to minimize storage costs, could still drive substantial additional storage revenues if it makes large inroads into VMware’s existing customer base.
Q: Anything else to add?
A: No, we’d be here forever. If you’re a customer, give us a call and we’ll walk through the implications for your business.
