Microsoft targets VMware with new deals

By Daisuke Wakabayashi and Jim Finkle

SEATTLE/BOSTON (Reuters) - Microsoft Corp (MSFT.O) said on Monday it bought a start-up company called Calista Technologies and expanded its alliance with Citrix Systems (CTXS.O), targeting the fast growing virtualization market.

Microsoft's moves are part of a broader call to arms against the early leader VMware Inc (VMW.N) in the market for technology that allows a single computer to act like many "virtual" machines, thus expanding its capacity to run various types of software and multiple operating systems.

"This is Microsoft coming out and staking the claim that they are serious about virtualization," said Forrester Research analyst Natalie Lambert. "When you think of VMware, you think virtualization. That is going to be a hurdle for Microsoft."

Virtualization is one of the most important developments in the software industry, because it disrupts the traditional business model, which marries one machine to one piece of software, such as an operating system.

The technology allows companies to save on hardware costs by running existing equipment more efficiently, while allowing companies to deploy applications faster without worrying that certain pieces of software will clash with one another.

Microsoft, the world's largest software maker, acquired Calista for an undisclosed sum. Calista designs technology that helps compress and deliver "virtualized" desktops running on a remote computer server.

Citrix is developing a software tool that helps Microsoft's new Windows Server 2008, which will incorporate virtualization technology known as Hyper-V, to be compatible with Citrix's competing XenServer product.

The two companies will also join together in marketing desktop virtualization, which separates a computer's desktop from its physical location. For example, a traveling worker may access the desktop computer in his office by calling up a virtualized version of the machine over an network connection.

Microsoft leads a pack of entrenched software makers including Oracle Corp (ORCL.O) and Sun Microsystems Inc (JAVA.O) looking to close the gap on VMware, the first company to commercialize server virtualization technology.

Analysts say the virtualization wars have just begun and scores of companies -- start-ups and tech giants -- are working to figure out how virtualization can be adapted to improve all types of products from security software to microchips.

Shares of VMware, which is majority-owned by data storage firm EMC Corp (EMC.N), have nearly tripled since its initial public offering in August, but the stock is off nearly 35 percent from its late-October highs due in part to concerns about increasing competition.

WAITING ON HYPER-V

Microsoft plans to release Windows Server 2008 in February. Six months after that release, Microsoft plans to introduce Hyper-V, an extra software layer that sits between the hardware and operating system. It will compete with VMware's main server product.

The company has reported multiple delays in completing the virtualization component of Windows Server 2008.

By building virtualization into the operating system, Microsoft said it can offer customers virtualization capability for a third of the competitors' prices. Customers will also need to buy a Microsoft product called Systems Center Virtual Machine Manager to manage virtualized and non-virtualized servers.