VMware sets cut-off for partners to switch to per-VM licenses

VMware is moving to ensure all of its service provider partners are signed up on a 'per-VM' licensing plan by September, in preparation for the anticipated "official" launch of the vendor's vCloud program.

The lion's share of VMware's service providers are already signed up to the VMware Service Provider [licensing] Program, introduced in June 2007, under which service providers are billed by VMware according to how many virtual machines the service provider rents to customers over a given month.

New VMware partners, such as telcos and traditional systems integrators offering cloud computing, are already signed up to the program.

For a small number of VMware service provider partners, particularly the first few hosting companies that signed up with the vendor over two years ago (Bulletproof Networks, Macquarie Hosting and Melbourne IT among them), this 'per-VM' licensing regime is a very different business model to the fixed-term, per-processor agreements originally struck with the vendor.

Out with the old

Dan McLean, business development manager for VMware Australia told iTnews that up until two years ago, VMware struck licensing deals with its service provider partners that were less defined and "deployed in each market according to distribution agreements".

The agreements varied "on a transaction basis" (from customer to customer) and were based on a fixed term or per-capacity basis, or combination of both. 

Most of those fixed term contracts came up for renewal in the last 12 months, and VMware has gradually moved to sign up partners to a 'per-VM' model upon renewal.

"The Service Provider Program has now been ramped up a whole lot due to the emergence of the cloud marketplace," McLean said.

The change in licensing model works well for some partners and not for others.

Bulletproof Networks, one of VMware's oldest hosting partners, is about to step up to the new model.

Bulletproof COO Lorenzo Modesto says that assuming VMware gets its pricing right, the change "makes sense at the high end of the market."

"VMware's first few goes at licensing to service providers was a bit of an after-thought," he said.

But doing the sums, other VMware hosting partners report that the 'per-VM' model is actually more expensive - namely because they had built product offerings around highly dense environments to gain maximum margins.

The older model was more cost-effective, one hosting provider told iTnews, because the new program dictates service providers pay a license per gigabyte of memory allocated per virtual machine. This means that those using closest to one gigabyte of memory per virtual machine get the best value out of the license.  For those using very little memory - and even more so for those at the opposite extreme running high density environments with multiple gigabytes of memory attached to a given virtual machine - the licensing costs are higher on the new program than on the deals they had formerly struck with the vendor.

"It comes down to your density," said the source, on the condition of anonymity. "If you run at maximum density, the older model is more attractive."

Modesto said that such a strategy favours the corporate end of the market over mass market hosting companies. But he thinks the shoe fits.

"I know this licensing won't work well with those players with high contention rates," he said. "It won't work for low-end providers.

"But if you are packing a whole swag of virtual machines into a small number of hosts - if you treat ESX as a bargain basement platform and overrun it with contention, there is something wrong with your business model. That is more appropriate for open source platforms like Xen."

In with the new

VMware's two-year old per-VM licensing regime shares some traits with mobile phone plans. 

A service provider chooses a 'low water mark' of how many virtual machines they expect to offer to customers per month over a 12-month period.

Each month, the service provider pays VMware a flat fee for that 'threshold' of virtual machines, plus a separate rate for every virtual machine served above and beyond that threshold.

Service providers can shift to a higher threshold within a 12 month contract at no extra charge. The higher the threshold and the more VMware products a telco or hosting provider licenses, the better bulk discount that service provider can negotiate with VMware.

McLean said VMware shifted to this licensing regime to align itself with the business models of its partners and the demands of end-user customers.

VMware has opted to drive business through partners rather than take it direct, he said.

"Making a big upfront capital investment in software - on top of all the servers, storage, security, cooling - is not nearly as attractive for a service provider as selling one VM at a time and paying us when you sell a service," he said.

He denies that such a strategy provides the vendor too much control of the margins of its partners.

[A more recent VMware cloud service provider reports that the margins available under the program were "slim", but big enough to build a business on.]

"In older models, the vendor would be paid upfront for a license and whether the service provider is successful or not was wholly in the hands of the service provider," McLean said.

"A pay-per-use model means that it is in VMware's best interest that pricing is satisfactory for the service provider to make good margins and sell more licenses. Our entire strategy relies on the service provider being successful. If they can't make margins and can't sell to the customer, we get paid nothing."

End-user customers, he said, can no longer ask customers to commit to three year contracts in order to justify the upfront payment of licenses to VMware.

"That reeks to the customer of outsourcing," McLean said.

McLean queried why any service provider would feel slighted by the 'per-VM' approach.

"Most of our partners are ecstatic with the [per-VM] model," he said. "It's very much consistent with the way telcos sell broadband and mobile phone plans."

Will the strategy work?

IBRS analyst Kevin McIsaac believes that having different licensing models for end-user organisations and public cloud providers could "create problems."

"Organisations may find that a public cloud, where providers have to use a per-VM licencing model, may be uncompetitive compared to their own private clouds where they can use server-based licencing," he warned.

"Clearly, VMware is trying to protect its revenue from Moore's law. By charging per-VM, it protects its revenue against the continual increases in VM density driven by each new generation of CPU."