Virtualization ROI Rises, Cloud Confusion Steals Spotlight

While the newest version of VMware's vSphere virtualization suite (see review here) represents a big step toward practical cloud computing, virtualization technology continues to spread based on the same basic benefits that made it popular in the first place, analysts say.

Virtualization makes it so much easier to consolidate a company's inventory of servers and maintain them that it sometimes justifies its own cost through more than one cycle of upgrades.

"We had one client that was able to justify a complete server hardware refresh because it could upgrade without having to buy any additional VMware server licenses," according to Chris Wolf, infrastructure analyst for Gartner Group. "They moved from servers with four cores to servers with 12 cores and were able to run more VMs on fewer servers at a significant cost savings."

[ Need metrics to demonstrate cloud computing's ROI to the business? See CIO.com's related article, 8 Ways to Measure Cloud ROI. ]

Most disruptive technologies deliver big savings only when they're first implemented. Improvements in the power of x86-based servers, better virtual-server acceleration mechanisms in Intel and AMD chipsets, and the increasing number of VM-specific products is delivering cost benefits even in second- or third-generation virtual infrastructures, according to Paul McWilliams, editor of NextInnings.com, a financial-analysis service focused on technology investments.

"In the first round of virtualization the chipsets took some advantage [of virtualization], but now people are building hardware designed to leverage it and you see how you get more benefit from virtualizing other things -- switches and networks and storage working more effectively," McWilliams says.

An IDC report released in June estimated that in 2009 cloud-based services accounted for $16 billion of the approximately $2.5 trillion in global spending on IT. The report forecast that number would rise to $55.5 billion by 2014-12 percent of all spending on IT.

Many of the customers whose money might go to cloud-based IT, however, are "suffering from cloud confusion," according to a July 6 report from Forrester Research.

Some of the confusion is due to vendors who apply the term "cloud" to everything in their inventories; the rest is the failure of vendors to explain the technology's potential clearly, the report concludes.

That confusion makes many companies leery about cloud computing, but not about the concrete benefits they get from the virtualization technologies on which cloud services would have to be built, according to Bernard Golden, CEO of consultancy Hyperstratus and a CIO.com blogger.

"You start with a base level [of virtualization] and add more layers to get more agility or resliency and eventually get full automation and governance and other things you associate with cloud computing," Golden says. "There is this notion that people don't want to build internal clouds because it's too much hassle, so they do these tactical things. If you add up enough tactics, you end up with a strategy."

There is still a split in the level of adoption of even basic virtual-server technology, Wolf says. Early adopters range between having 60 percent and 100 percent of their servers virtualized; late adopters are typically between 20 percent and 40 percent, he says.

There is also a lively competition even at the most basic level of virtualization, he says. Customers planning cloud projects in the near term tend to run VMware; those focused on cost often go with Microsoft or Citrix.

"If high availability and live migration are the things you really need, Hyper-V can deliver on those right now and it's easier to start with it today than it would be to switch to it in two or three years," Wolf says. "For organizations focused on cost, or that are worried VMware has the potential for lock-in with a vertical stack, Microsoft or Citrix are still good options."

While VMware's market valuation of $29 billion and price/earnings ratio of 140 are "inflated" by optimistic investors, McWilliams says, virtualization will continue to drive sales of both IT stocks and IT products.

"I'm hard-pressed to find a tech company that says it has seen a material drop in demand and most say demand remains strong or better," McWilliams says of the IT market in general. "Virtualization is especially strong. Once you try it, you're hooked."

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Read more about virtualization in CIO's Virtualization Drilldown.

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