Yesterday’s feeding frenzy for VMware’s freshly spawned stock may or may not prove to be rational, but, together with today’s news that Citrix is paying a hefty price to buy XenSource, what it clearly shows is that investors have taken notice of a sea change in the IT business: a great deal of money that would traditionally have gone into hardware is now going into software instead. VMware’s and Xen’s virtualization software allows companies to turn a single computer into two or more “virtual” computers, each of which can be doing a different job. Essentially, it allows computer owners to tap into the spare processing capacity of their machines – spare capacity that has traditionally been wasted and that appears to have increased steadily as Moore’s Law has pushed up the power of microprocessors.
Some argue that virtualization will ultimately spur greater purchases of servers and other hardware. In a recent blog post, for example, Sun Microsystems CEO Jonathan Schwartz wrote, “I’d like to go on record saying virtualization is good for the technology industry – which seems to be counterintuitive. The general fear is that technologies like Solaris 10 or VMware that help people squeeze more work from the systems they already own is somehow bad for Sun. In my view, quite the opposite is true. As I said, when we double the speed of our computers, people don’t buy half as many – they tend to buy twice as many.”
Schwartz’s analysis has a basic flaw – he conflates two things, processor speed and processor capacity utilization, that, while related, are different – but that doesn’t necessarily mean his conclusion is wrong. In fact, if you look only at the near term, he may well be right. Virtualization will likely spur purchases of servers – for the simple reason that when companies consolidate their machines they often upgrade their hardware at the same time (to get the full benefits of virtualization).
But what about the longer term? Here, it seems to me, the picture is very different. It’s becoming clear that, for large companies in particular, the consolidation of hardware can take place on a truly vast scale. Siemens Medical Solutions, for instance, used virtualization to increase the capacity utilization of its servers from 4% (yes, you read that right) to about 65%, enabling it to reduce the number of servers it runs by about 90%. Hewlett-Packard, itself a major server supplier, is engaged in a massive consolidation effort of its own, which it expects to reduce the number of servers it runs by nearly a third even as it increases its available computing power by 80%. These are not unusual results, and consolidation ratios will likely continue to expand as virtualization, server, and processor technologies advance. When you consider that we are only at the beginning of a major wave of consolidation that will enable big companies to operate with far fewer computers, it becomes difficult to imagine that we’ll end up with more servers in corporate data centers.
That doesn’t mean that there aren’t new applications of computing that will require substantial increases in processing power. I tend to agree with another Sun executive, CTO Greg Papadopoulos, that we’ll see an increasing demand for high-performance computing that will involve considerable investment in new hardware. But Papadopoulos also points out that the processing demands of mainstream business applications – the meat and potatoes of the enterprise IT market – are not keeping up with the expansion of computing supply delivered by Moore’s Law. In other words, the hardware requirements of most business applications are going down, not up – and consolidation opportunities will only grow.
Moreover, much of the investment in high-performance computing is going into building central, utility data centers – for software-as-a-service applications, computing grids, and storage depots – that themselves displace the need for businesses to buy additional hardware. When a company signs up for, say, Salesforce.com’s CRM service instead of a CRM application from Oracle or Microsoft, it avoids having to buy its own servers. Similarly, when a small business or a school decides to use Google’s Gmail platform to run its email, it can avoid having to buy and run its own email server.
In other words, the consolidation of servers and other gear is not only occurring at the level of the individual company, through the adoption of virtualization and other technologies for improving capacity utilization. Utility computing offers the opportunity for consolidation to occur as well across entire industries and, indeed, the entire economy. While the total demand for computer processing cycles seems certain to continue its inexorable rise, that no longer means that the overall demand for computers needs to rise with it. The hardware business is changing, and investors are wise to take notice.