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Did Microsoft Just Say that VMware is More Profitable for Partners?

Sometimes, what one does not say, communicates a lot more than what one actually does say. That seemed to be the case last week when Microsoft released new collateral telling channel partners that they can achieve higher growth by selling Microsoft virtualization products alongside their existing VMware practices.

Unfortunately for Microsoft, the blogosphere heard a different message:

Wow – talk about an unintentional message. Instead of Microsoft’s intended message, people picked up on Microsoft’s change in tactics from “sell Hyper-V because it can go head-to-head with VMware” to “why don’t you try selling Hyper-V in addition to VMware – we promise it will make you more money” (my paraphrase). To quote the Virtualization Review article, “While this is not tantamount to raising a white flag, it is a stark, public acknowledgement of VMware's deeply embedded pre-eminence.” Thanks Microsoft for reaffirming what VMware partners and customers have known all along.

Microsoft Tool: Partners Get Better Margins with VMware

But, unintentional messages aside, is there truth behind the claim that Microsoft virtualization products can make partners more money? To answer this question, I spent some time playing with Microsoft’s Excel model (the heart of the new Microsoft collateral) that compares the revenue and margins from selling VMware versus Microsoft.

First of all, Microsoft’s model states that partners generally make better margins by selling VMware (default assumptions in the Microsoft model).

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Microsoft Tool Assumes Up to a 2x Win Rate Advantage over VMware – Quite Unrealistic

But if that’s the case, what is Microsoft’s argument for how partners can make more money selling Microsoft virtualization over VMware? As Steve Kaplan points out on his blog, the two biggest assumptions in the Microsoft’s model are 1) a higher win rate (i.e. closing more deals) when leading with a Microsoft virtualization offering, and 2) “upsell capture” where customers purchase more software/ hardware/services with the money they supposedly save with a Microsoft offering. (There are a bunch of other default assumptions that disadvantage VMware, which I list at the end of this blog, but higher win rate and upsell capture have the biggest impact on the model’s output.)

So what does the tool assume regarding win rates? The default ‘mature market’ assumption is that leading with Microsoft virtualization offerings will win 33% more Large Enterprise deals and 100% more Mid-market deals (2x) compared to if the partner leads with VMware offerings, resulting in partners making more margin with Microsoft virtualization. Those are pretty bold, and frankly, unsubstantiated assumptions given VMware’s dominant position in Large Enterprises (96% of the Fortune 1000 are VMware customers), VMware’s strong traction with our mid-market offerings (Acceleration Kits, Essentials Editions), and the fact that customers get a more reliable, more complete, and lower cost-per-application solution with VMware.

Just how sensitive is the Microsoft tool to the win-rate assumption? Let’s find out by making two simple adjustments to win-rate. Let’s give Microsoft the benefit of the doubt with a higher win rate in mid-market (33% more deals), put us on parity in the Large Enterprise (same win rate), and leave in place the model’s assumption that customers will buy more hardware/software/services because of the money they save with Microsoft (an assumption that Steven Kaplan challenges in his blog, but that’s another discussion). Now the VMware practice makes $1,021,000 of margin at the end of Year 3 while the Microsoft practice makes $948,000 of margin – so the VMware practice now makes more money, even with a 33% higher win-rate assumption for Microsoft in mid-market!

Microsoft Tool’s Default Assumptions Are Just Not Credible

This simple exercise is revealing because it shows what partners would have to believe in order for Microsoft virtualization to make them more money, essentially, that customers would have to overwhelmingly choose Microsoft virtualization products over VMware by an incredibly higher, unsubstantiated rate, in spite of the fact that VMware delivers far more compelling benefits to customers:

  • a more reliable and robust product,
  • a more complete platform for virtualizing applications,
  • a more comprehensive set of virtualization management solutions,
  • more customer choice with broader OS, application, and hardware support,
  • a more proven solution as evidenced by customer adoption and return on investment, and
  • a lower cost-per-application – a key component of total cost of ownership for a virtual environment.

Now, I realize that there are many VARs and consultants out there that have built very successful, profitable businesses selling Microsoft products, so my point is not about any channel partner’s existing Microsoft practices. But I do take issue with Microsoft’s claim that selling Microsoft virtualization is more profitable than selling VMware based on their “model” – Microsoft’s assumptions to make their case are just not credible.

VMware Channel Partner Ecosystem: 25,000+ Partners and Growing

To close, here are some facts about the ecosystem of VMware partners:

  • VMware has over 25,000 channel partners worldwide and that number is growing.
  • For every $20k of VMware licenses sold, partners sell another $225k of hardware/software/ services. (VMware research, 2008)
  • 75%+ of VMware’s revenue comes from our channel partners.

As you can see, VMware and its channel partners have a strong win-win relationship.

If you are a VAR or consultant and currently not a VMware channel partner, we invite you to check out the VMware Partner Network website to get information about how to become one. Let us help you grow your business by selling VMware while delivering the most trusted, most complete, lowest cost-per-application solution to your customer.

A Few Other Default Assumptions in the Microsoft Tool to be Aware of

  • Default assumption charges VMware projects a 10% premium on hourly labor.
  • Default assumption is that VMware projects take 10% more engineering hours to complete.
  • Default assumption results in partners completing almost twice the number of Microsoft projects as VMware projects in the same period of time without adding any additional headcount. Not realistic at all.
  • Default assumption appears to use an inconsistent mix of list price and channel price for Microsoft and VMware products. (I could not figure out a consistent methodology to the numbers. If you figure it out, make a comment below.)
  • Default assumption adds the cost of vSphere Enterprise Plus licenses in one scenario without explaining why VMware’s highest-end SKU was required, and there’s no acknowledgement that Enterprise Plus delivers far more functionality than the Microsoft offering.
  • Default assumption adds the cost of VMware Site Recovery Manager (SRM) licenses, our disaster recovery product, to another scenario without adding anything to the Microsoft stack, in spite of the fact that Microsoft has nothing comparable to SRM.

2 thoughts on “Did Microsoft Just Say that VMware is More Profitable for Partners?

  1. julien

    Thanx mark for this great post that sums up what i though about this tool => far too much complex for resellers (who dont have 1hr to fill a spreadsheat) and too many bold assumptions.
    However, there’s some truth in the Microsoft’s message.
    When you sell a VMware deal you just sell a virtualisation deal.
    When you sell a Hyper-V / System Center deal you sell a virtualisation + datacenter management deal. The later requires more assistance and counselling.
    And do resellers earn more margin selling licenses or services ?
    Second, i am not totally convinced when u write that VMware benefits from “a more complete platform for virtualizing applications” and “a more comprehensive set of virtualization management solutions”.
    Just have a look at System Center offering : http://www.microsoft.com/systemcenter/en/us/management-suites.aspx
    Operations Manager and Data Protection Manager bring great value to your virtualized infrastructure.
    As to “more customer choice with broader OS, application, and hardware support”, this is questionable and I think the topic was addressed in prior posts so I’ll invite readers to look back at them.
    All in all, I agree that Microsoft shouldnt have released such a tool, selling virtualisation is too much complex to be summed up in a spreadsheat with so many assumptions.

  2. Mark Chuang

    @julien
    Thanks for your comments. To read more about why we believe we have strengths in the areas I listed in the blog, I invite you to read our “VMware Advantages” website (www.vmware.com/technical-resources/advantages) which spells out why we feel they are our strengths. Cheers.

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