Yesterday Citrix bought VMware competitor XenSource for $500 million. We wrote two original articles about this that now have over 80 comments. There have also been another 50 or so articles published on other industry websites and dozens of blog entries about this deal. I’ve read every single one of them that I can find. In this article I’m going to try to summarize the more interesting theories and comments about what this acquisition means.
The thoughts fall into several categories. Let’s start with the biggest thing on everyone’s mind.
Citrix is paying $500 million for XenSource. XenSource has almost no revenue for 2007—certainly less that $10 million. Blogger Savio Rodrigues tackled this head-on. Correct me if I’m wrong but wouldn’t it take a lot less than $500M to develop competing technology to Xen? Alternatively, it’s open source, so Citrix could have forked Xen and had the technology for next to free. However, building a competitive offering or forking Xen would not deliver the user base of Xen, the linkage with RHEL/SUSE or the Linux kernel in the future. Tell me that this deal had to do with acquiring a brand and a user base / widely distributed technology. Don’t tell me this is about innovation that can’t be matched by larger Traditional vendors.
Sure Citrix could develop their own Xen, but how long would that take? Buying makes a lot more sense. And I think we can put that price in perspective a little bit. Citrix’s press release said that XenSource is forcasting $50 million revenue for 2008. Philip Winslow, an analyst for Credit Suisse, pointed out that a “10x 2008 revenue multiple on the expected $50 million revenue contribution...is within the range of recent transactions associated with the server virtualization market of 11-14x 2008 revenue.”
And if you don’t believe that XenSource can do $50 million in 2007, Winslow goes on to write, “From a market share perspective, $50 million in XenSource revenue represents approximately 2.5% of the virtual machine market in 2008--which we view as achievable.” (You can download the full Credit Suisse analysis of the Citrix / XenSource deal as a PDF at the top of this article.)
One final note on price. On the analysts call this morning, Citrix Marketing Chief Wes Wasson said that Citrix expects the XenSource unit to result in a “$200m business over the next couple of years.”
Citrix had over $900 million in cash, so maybe $500 million wasn’t that far off? But still, is Citrix crazy or brilliant?
Citrix is crazy
In the comments of the article Gabe and I wrote last Thursday about this deal (a “rumor” at the time), Tim Mangan wrote, “A XenSource purchase would not be good for the industry nor for Citrix Customers, especially if Citrix keeps up the practice of "bundling" these technologies. Eventually Citrix will need to break out the technologies better to let customers buy just what they need. But how long before we get to that point?”
Citrix is brilliant
Of course there are plenty of other people who think this deal was the most brilliant thing that Citrix could have done. An eWeek article quotes The 451 Group analyst Brenon Daly as saying, "Citrix built a $1 billion-plus business on the back of its access to Microsoft source code. XenSource's exclusive access to Microsoft's forthcoming 'Viridian' hypervisor code is a key driver for this deal," he told eWEEK Aug. 15. "For Citrix, Viridian becomes the base operating system component for its next business, just as Windows Terminal Server has been for Presentation Server."
The 451 Group also released an analyst report yesterday. In addition to what was mentioned in the eWeek article, the report discussed how else this deal could help Citrix. Quoting from the report, "Citrix could give XenSource the channel infrastructure it needs to put real price pressure on VMware, while Xen's crucial and growing relationship with Symantec/Veritas—remember XenSource CEO Peter Levine was an early employee at Veritas—gives it links into the storage world that will play well with enterprise customers and provide Citrix a counter to VMware's relationship with EMC."
My own thoughts on this are that this XenSource thing will be a really positive thing for the Citrix channel. Application delivery and virtualization have been going hand-in-hand for a while. (Just look at our website.) This is a much more natural fit than Citrix trying to convince it’s Windows application channel to push SSL-VPN appliances or HTTP acceleration appliances.
While we’re still on the topic of good things that can come out of this acquisition, here’s another thought from Savio Rodrigues. (Remember he is not a Citrix guy.) “By the way, how many of you have heard or thought about Citrix in the past 5 years? Did anyone know they have revenues over one billion dollars? Exactly. This acquisition is as much a reason for Citrix to get back in the public/customer/investor eye as it is about a technology acquisition.”
Case-in-point, even the Associated Press did a story about this deal!
What does Microsoft think?
This seems to be the most hotly-contested aspect of the deal. Does Microsoft like the fact that it’s global ISV partner of the year just bought a competitor to a competitor? Confused? Microsoft loves Citrix. Microsoft hates VMware. XenSource hates VMware. Citrix buys XenSource. Does this mean that Microsoft loves XenSource? (common enemy) Or does this mean Microsoft hates XenSource? (competition)
On the surface, it appears that Microsoft is supportive of this deal. From the press release:
The acquisition will also strengthen each company’s strong partnership with Microsoft and commitment to the Windows platform. As an independent company, XenSource has built a strategic relationship with Microsoft designed to ensure broad interoperability between XenSource products and the upcoming Microsoft Windows hypervisor, code named “Viridian”. This relationship complements and broadens the successful partnership between Citrix and Microsoft in the Windows application delivery, application networking and branch office infrastructure markets.
“Although the market is still in the earliest phase, virtualization already offers significant opportunities for cost savings and innovation,” said Bob Muglia, senior vice president, Microsoft Server & Tools Business. “Citrix and XenSource have long been strong partners for Microsoft and it is exciting to see them team up to help move the market forward.”
However, a visitor posting as a guest on BrianMadden.com yesterday shared these thoughts:
I thought it would be fun to dissect Muglia's quote:
"Although the market is still in the earliest phase, virtualization already offers significant opportunities for cost savings and innovation,"
i.e. Server virtualization has only affected 5% of x86 servers according to IDC. It's still early days. Citrix can do what it wants for the next 12 months. Viridian comes out and only Microsoft and VMware will matter.
"Citrix and XenSource have long been strong partners for Microsoft"
i.e. Citrix and XenSource are both Microsoft ecosystem partners. They can waste their money, kill each other, [and] try to slow the adoption of VMware until we come out with Viridian. If you are fighting against VMware, you're on my team--until Viridian comes out.
"and it is exciting to see them team up to help move the market forward."
i.e. It's a thriller / horror / blood-bath movie made in Bollywood. It will be a flop in the theaters, but at least it's not my money. So you have my blessings. Go right ahead, but get out of the way when Viridian comes out.
But getting back to what Microsoft really thinks about this deal. Another guest posted the following on BrianMadden.com yesterday:
"Do you really think Citrix would buy a major hypervisor player in a fast growing market without talking to their biggest partner (Microsoft) first? My guess is that Microsoft has known about this for quite some time and given their blessing at the highest levels. If Microsoft told Citrix this was a mistake, Citrix would be insane to make this deal."
Industry expert Benny Tritsch agreed, also posting a comment to yesterday’s article
“Microsoft knew about the Citrix plans to acquire XenSource and even encouraged Citrix to do it. In this case an important virtualization technology is kept within the eco system of friends. VMware would not be very happy about this situation, the MS-Citrix relationship would even be stronger than before.”
He continued in another post, “What if Microsoft deliberately wants Citrix to buy XenSource, which may prevent Microsoft from legal issues regarding their potential market domination with virtualization products. What do you think VMware would do if Microsoft bought XenSource? They would probably try to prevent this by suing Microsoft. But if Citrix buys XenSource, there is nothing VMware can do.
But why should Citrix do what Microsoft wants them to do? Well, Microsoft and Citrix are so friendly to each other during the last years. Microsoft did not include new TS features into Windows Server 2003 R2, which gave Citrix more time to develop their own new product features. Citrix never supported Linux seriously, Citrix moves from their Java Console to an MMC snap-in; both is good for Microsoft. Not even the discussions around Softricity and Tarpon caused any serious trouble in the Microsoft-Citrix relationship. At this year's Citrix iForum Europe and Microsoft Tech-Ed US both vendors made sure how much they like each other (except if you listen to former Softricity folks). And from an economic point of view it works perfectly, Citrix was never more successful as today, strictly following the path that Microsoft proposes them to go. So to me, Citrix acquiring XenSource, would make a lot of sense -- independent of what Citrix really wants to do with XenSource. From a strategic standpoint it could be true that controlling a technology is more valuable than delivering the same technology as fast and as expensive as possible...”
But Benny didn’t stop there. He also posed a second possible scenario:
“Microsoft planned some move Citrix didn't like. So Citrix decided to do the first move in fighting back - by acquiring XenSource. If this is the case we will not have this eco system of friends anymore, even if Microsoft knew about the Citrix plans. VMware and all the Citrix competitors would love this new situation because of the changes in the market landscape it could generate.”
This is certainly interesting—the notion that Citrix did this as a defensive move. But what about the Bob Muglia quotes in the press release? Personally I think that even if Microsoft was secretly very upset about this, they’d still have to act like they support it in public. After all, Viridian is still a long ways away, and Microsoft wouldn’t want to give Citrix / XenSource the “public credit” of being a threat. So they say “Oh yes! Of course this is great.”
Another guest poster from our site took this a step further:
“The market share turf battles have just begun. Let’s imagine that Citrix is secretly working on Presentation Server for Linux. Brian once wrote an article on this.
You optimize XEN to work well with Presentation Server for Linux. You use free application software such as star office and others. Citrix starts promoting/advertising that all you need is Citrix user licenses. No MS Office, No MS operating system, No annual fee to MS....etc. You install free Linux on all your client computers or use an inexpensive thin client. You have just saved your company 75%+ of its annual Software expenses.
Oh - you can run PS 5 for Windows 2008 to support legacy Windows Applications in the same farm as PS for Linux. All servers point to the same Data Store.”
But let’s take a step back for a minute. I want to go back to the notion of Microsoft and Citrix plotting together to make this acquisition. Another guest poster to our site from yesterday took that a step further:
“It’s possible that MSFT was having even more difficulty than originally anticipated with Viridian and is going to miss the "180 days after WS 2008" launch. In order to not let VMware capitalize on the opportunity, they encourage Citrix to buy into this high-growth market, by assuring Citrix that it has 24 months to sell the existing product and innovate well behind this to continue to have a value proposition in excess of what Viridian has (after all, isn't this what CTXS has done for years with TS?). CTXS has had high growth ambitions since it started its acquisition strategy several years ago. This helps drive this growth and helps the Microsoft relationship. Long-term, Viridian will rule, by then, XenSource needs to have moved on to greater things.”
One poster on BrianMadden.com yesterday believes almost the same thing, but with a totally different outcome. (One that will benefit VMware rather than Citrix / Microsoft.) He or she wrote:
“This would be great from a VMware point of view! MS is delaying almost all the relevant hypervisor features in Windows 2008 SRV, and if Citrix would buy Xen it would mean the elimination of the last major virtualization competitor. We all know Citrix's track record for acquisitions....they pretty much stink....Sequoia anyone ??”
Does this make Citrix a more attractive target?
One aspect of this deal that several people are suggesting (that I did not consider at all) is that Citrix acquiring XenSource will make them (Citrix) more attractive to potential buyers. Now they have a $1+ billion enterprise business plus one of the last real hypervisor players, anyone else who wants in the virtualization market might have to go there now.
Some people are suggesting that Microsoft might try to buy Citrix now. They also mentioned that HP or Cisco would likely be interested in buying Citrix, which is an idea that I’ve floated before and I think makes a lot of sense.
Will Citrix still support the open source Xen?
Of course Citrix is buying a commercial company called XenSource. The actual virtualization engine is an open source project called “Xen.” (Xen, by the way, is the engine on which several other virtualization companies are built, including Virtual Iron.) That said, XenSource was the primary driver behind Xen. But what will happen to that effort once Citrix owns XenSource?
Rachel Chalmers wrote in eWeek that "Citrix and XenSource are discussing spinning out the open-source Xen project into a nonprofit foundation, as IBM has done with Eclipse."
XenSource CEO Peter Levine said, "Think of the open source Xen project as being run by the community. XenSource is involved as leader and active partner but there is a separation between what XenSource does with its commercial products and what goes on in the Xen open source community. To continue to promote open source leadership we'll be working on an independent body to help manage and take over the Xen project."
Others aren’t too sure. On BrianMadden.com yesterday, Mike Nelson wrote, “One thing is for sure, when Citrix gets involved, you can kiss Xen's open source initiatives goobye. And that is a very sad result. They'll see only $$ signs now, and if history holds true, open source can't play in their sandbox, cause Citrix will keep stealing their shovels.”
The bottom line?
Hard to say. My personal opinion is that it will take Microsoft a while to get Viridian to where it can be a true competitor to VMware, so in the meantime, they’ll be all over Citrix and XenSource. But once Viridian is released, look out!
Personally I need to do more research. I need to learn more about Viridian, more about XenSource, and figure out the real difference between the various technologies in the market. We’ll definitely be sharing more as we learn it.