UPDATE 4-Oracle adds virtualization; VMware shares fall

Mon Nov 12, 2007 6:50pm EST

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(Adds VMware comment, paragraph 7)

By Jim Finkle

BOSTON Nov 12 (Reuters) - Oracle Corp ORCL.O made a move on Monday to take on VMWare Inc (VMW.N) in the market for virtualization software, unveiling a product that it says is three times more efficient than competitors' offerings.

VMware shares fell 8.4 percent after executives at Oracle, the world's second-largest software maker, demonstrated the product before thousands of customers at a conference in San Francisco. Oracle shares rose as much as 2.9 percent.

Customers can download "Oracle VM" for free starting on Wednesday, the company said. Oracle will sell service contracts for the product ranging from $499 to $999 per year.

Virtualization software allows companies to save costs by squeezing more resources out of each computer, helping businesses save on electricity, space in data centers, maintenance fees and other expenses.

That market is now dominated by VMware, an affiliate of EMC Corp (EMC.N).

"Is this bad news for VMware? Yes," said Trip Chowdhry, an analyst with Global Equities Research. "This tells us that the virtualization market will not belong to VMware. One of the players will be Oracle. Until today that news has not been factored into the stock price."

When asked if VMware was concerned about the challenge from Oracle, a company spokesman e-mailed a statement from Vice President Parag Patel that said, "We believe customers want a consistent approach to virtualization that has a proven track record with mission critical deployments and a complete offering."

The software maker said in a quarterly report filed with the U.S. Securities and Exchange Commission last week that new competition from a large established software maker could push down product prices and reduce profit margins.

Jefferies & Co. analyst Katherine Egbert said she wanted to get more information about Oracle VM because at first glance it looked like VMware's technology might be more robust on Windows machines.

Almost all servers that are used for virtualization are Windows machines, she said, so Oracle may only be addressing a tiny segment of the potential market, she said.

VMware went public in August in what was the hottest technology initial public offering in years. VMware has a market value of about $34 billion, making it the fourth-largest publicly held software maker in the world.

The stock closed down $7.38 at $80.36 on the New York Stock Exchange, but it remains far above its IPO price of $29 a share. EMC, which owns 86 percent of VMware, saw its shares fall 5.42 percent to $18.83.

Oracle shares ended up 0.41 percent at $19.44 after hitting a session high of $19.92.

Oracle's services contracts cover updates, bug fixes and other support services and will cost either $499 or $999 per year, depending on the type of computer that is running the software, according to its Web site, www.oracle.com/virtualization.

Microsoft Corp (MSFT.O), Red Hat Inc (RHT.N), Novell Inc NOVL.O, and Citrix Systems Inc (CTXS.O) also sell virtualization software, though the functions are more limited than those of VMware products. (Editing by Maureen Bavdek, Gerald E. McCormick and Carol Bishopric)

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