Despite layoffs, VMware has a big bet on this one cloud innovation

CEO Gelsinger hints that how network virtualization will be a key technology for the company

These are turbulent times for the venerable virtualization company VMware.

In an earnings call this week CEO Pat Gelsinger admitted that last year was a “challenging time” for VMware investors. The company’s core compute virtualization products are “reaching maturity” and will be a decreasing portion of the company’s future business, he says.

VMware announced 800 layoffs this week and that its CFO has left the company. A planned merger by its parent company EMC with Dell is hanging over the company. But Gelsinger hinted at one big cloud-networking feature he’s hoping will propel the company’s future cloud plans.

+ MORE AT NETWORK WORLD: Deep dive conversation with Pat Gelsinger | From VMworld: How VMware aims to distinguish itself in the cloud +

As part of the restructuring Gelsinger said VMware is leveling off its investments in its public cloud platform named vCloudAir (vCA). With a “narrower focus” for vCA, Gelsinger says the company will prioritize services that only VMware can provide. What exactly does that mean? Gelsinger provided a hint.

Last year VMware previewed the capability of its NSX network virtualization platform to act as a software connection between customers’ on-premises data centers and vCA. This year the company will expand that capability so that NSX can be used as a connection platform between customers’ sites and many public clouds, including Amazon Web Services and Microsoft Azure.

This could be a big deal in the broader IaaS cloud market. There are a handful of ways for customers to connect to the public cloud: a simple Internet connection, a direct connection from your data center to the cloud, or routing through a collocation provider like Equinix, which then connects to the cloud. VMware is hoping NSX can act as an encrypted, secure conduit between customers and the cloud.

“Later this year, we will be introducing a new NSX offering, which will enable customers to create secure and encrypted overlay networks across public clouds including AWS and Azure and On-Premise Data Centers,” Gelsinger said in the company’s earnings call, according to a transcript.

This capability could be just the jolt VMware needs. VMware is aggressively marketing itself beyond its compute virtualization management software. Virtualized network and storage make up what VMware calls the Software Defined Data Center. NSX is already one of the bright spots of VMware’s assets. It has doubled its revenues to $600 million in the last year.

Meanwhile, vCA has had fits and starts. VMware has partnered with Google’s IaaS public cloud to offer customers “scale out” capacity from vCA. After EMC bought competing cloud provider Virtustream the plan was for vCA to be rolled into that business. Gelsinger backed out of that plan though. The recent departure of two cloud executives from the company – Simone Brunozzi and Mathew Lodge, who both left for startups – reinforces this uncertain nature of vCA’s future.

Peter Christy, research director for networking at 451 Research, says extending NSX to other public clouds is a natural, logical step for the company. Gelsinger seems to have realized that spending billions of dollars to compete head on with AWS is not viable, so instead he’s hoping to focus on management tools and network software. On the plus side, VMware has a massive enterprise customer base that it can sell to. And Christy says NSX could be appealing to network engineers who are tasked with creating many new networks for application developers.

The trouble is Microsoft is looking at a similar strategy of enabling the hybrid cloud with the addition of Azure Stack, which is a private cloud mirror of its IaaS public cloud.

Copyright © 2016 IDG Communications, Inc.

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