Federal Virtualization Business: Let the Vendor Clawing and Scratching Begin

The Obama administration’s program to modernize federal information technology operations is now in its second year, and the momentum for reform is continuing at a high level.

“We are seizing on the power of 21st century technology to consolidate data centers and moving to lightweight, shareable technologies, such as cloud computing, while also directing agencies to consolidate commodity IT services, and shift to shared services,” Federal Chief Information Officer Steven VanRoekel said last week in a briefing on the administration’s IT budget for 2013.

In the federal IT world, efficiency, data consolidation, cloud technology, and “doing more with less” have become the operative buzz words. But below decks, the more workaday tasks for actually implementing the headline goals are now becoming the focus of attention. One of the chief tools for accomplishing those goals is the use of computer virtualization software and services.

Federal IT professionals are becoming increasingly aware of the value that virtualization plays in data consolidation, cloud computing, and server rationalization. Nearly 82 percent of 151 federal IT professionals reported their agencies had already implemented some type of server virtualization in a recent survey released by MeriTalk.

The economics of virtualization are especially appealing, the survey indicated. Federal respondents expected that IT budget savings resulting from virtualization would increase from 19 percent in 2012 to 30 percent by 2015.

“Everywhere you see data consolidation there is virtualization behind it. We are going to see massive savings over the next several years. Virtualization is a key component of everything we’re doing,” VanRoekel told CRM Buyer during last week’s briefing.

For providers, the federal virtualization market appears both attractive and sustainable. Federal agencies spent about US$800 million on virtualization in 2009 and are likely to boost that to $1.4 billion annually by 2014, according to a study by Deltek.

“My recent conversations with government contacts and contractors concur with our 2009 surveys. We believe that storage and network virtualization are the next trend, and those two purposes also align more easily with data center consolidation efforts since they apply to the organization’s IT infrastructure,” Angie Petty, senior principal analyst at Deltek, told CRM Buyer.

Stiff Competition Ahead

It appears that marketing virtualization to federal agencies will be as competitive and tricky as it is in the private sector. Major players will contend for the chance to provide broad virtualization foundation capabilities, while vendors of special use and niche applications will find opportunities as well.

“Right now, VMware, Citrix Systems and Microsoft are the market leaders in federal virtualization. Leading platforms include VMware’s vSphere, Citrix’s XenServer, and Microsoft’s Hyper-V. I would look for these three to continue to lead the pack as the federal virtualization market develops,” Brian Coyle, principal analyst at Deltek, told CRM Buyer.

“IBM, Oracle, and Hewlett-Packard also have strong virtualization solutions, while there are several open source options,” he said. “Other players include CA, Red Hat and Dell. All of the top-tier IT companies have been active in mergers and acquisitions, snapping up smaller cloud computing/virtualization firms which provide unique and niche capabilities.”

Pioneer virtualization provider VMware clearly has its sights set on garnering a big share of the federal market as it has done in the private sector.

“Competitively, our experience with the federal government is very significant. We have worked with virtually all departments and many independent agencies so we feel pretty well positioned to take advantage of the potential for virtualization at the federal level,” Mark Chuang, director of product marketing at VMware, told CRM Buyer.

“VMware is still the market share leader with the top technology, but its offerings can be expensive. Microsoft is gaining, but most of its deployments are in smaller-scale environments, and the federal market is characterized by big-scale implementations,” Tom Bittman, vice president and industry analyst at Gartner, told CRM Buyer. “Another provider to watch is Oracle, not because of the basic service like VMware or Microsoft, but rather focusing on virtualizing the Oracle stack of database and applications.”

VMware’s established technical expertise, especially in large-enterprise and data center applications, will continue to support its significant market share, according to Roy Sanford, chief marketing officer at Stratus Technologies. However, Microsoft’s improving technical capability, its strong presence in mid-sized applications, and its competitive pricing “are difficult to combat,” he said.

For federal acquisition officials, vendor selection will depend on technical requirements, assessments of quality and value from different providers, and differing pricing plans. For example, Microsoft touts the fact that one of its core offerings is provided free as part of an operating system package.

“The reason we offer virtualization at no charge in Windows Server 2008 R2 is that we feel that capability should be a cornerstone component of the OS,” Susie Adams, federal chief technology officer at Microsoft, told CRM Buyer.

VMware also offers some complimentary services, according Mark Chuang, director of product marketing, who contends that Microsoft “monetizes its free offering somewhere.” The strong competition between the two vendors came to light last year when VMware posted an upgrade and revision for one its basic offerings. Microsoft quickly criticized the pricing aspects of the move through a company blog, and VMware responded with a critique of Microsoft’s position.

The blog war between the two firms characterizes varied industry approaches to virtualization marketing.

“Everybody has a different way of monetizing their services,” said Gartner’s Bittman.

VMware’s primary revenue driver is its management software, whereas Microsoft leans heavily on the inclusion of virtualization within its OS package, he noted.

Microsoft’s recent gains in market share are partly a result of its “bundling strategy,” according to a 2011 assessment issued by Stratus and industry consultant ITIC.

Potential Procurement Puzzle

As a result of these variations, virtualization vendor procurement will be a challenge. The federal CIO has been encouraging commodity IT procurement practices supported by General Services Administration (GSA) acquisition vehicles, but it seems that virtualization procurement tilts more toward a customized environment.

“Virtualization may not be suitable for a ‘commodity’ approach to acquisition at the federal level, due to the different missions of the agencies. The ‘one size fits all’ approach isn’t really appropriate,” Aileen Black, vice president, federal sector, at VMware, told CRM Buyer.

“The government is more risk-averse than the enterprise when it comes to preferred vendors,” said Sanford.

“Generally, the scale of implementations, coupled with increasingly vocal mandates for data sharing and interoperability, definitely favor the market leaders,” he explained.

“Also, users want choice. They will tolerate incompatibilities and lock-ins for only so long. They want to use what makes the most sense for them, be it from one vendor or many,” Sanford emphasized. “Increasingly, vendors will be forced into seamless interoperability, which is not to VMware’s best interest.”

Another factor in the federal market will be the use of multiple vendors associated with programs embracing a broad range of objectives.

“As the technology road map continues to unfold, virtualization vendors should have numerous opportunities,” said Deltek’s Coyle. “However, partnering will be critical, because most requirements will be embedded within larger modernization projects.”