Is VMware Alienating Customers? (VMW, EMC, NFLX, CTXS)

VMware Inc. (NYSE: VMW) is still the essentially unchallenged king of virtualization.  History dictates that when the king taxes the population too egregiously that bad things start to happen.  This may be a lesson learned for VMware regarding new pricing structures.

There is some interesting jawboning going on here, and someone will end up being right and someone will end up being wrong.  Information Week magazine ran an article recently (also at the Techweb site under UBM) on the matter.  VMware’s pricing appears to have not changed, but the article noted, “vSphere 5.0. At that time, I was pleasantly surprised to hear that VMware was not changing its base pricing. And while that’s true, the company has drastically revamped how it treats and now charges for memory usage. The result will be much higher licensing costs for many users.”

This may be nothing short of a stealth price hike by putting some limits on data usage.  In one case, the article noted showed that the $3,495 per license can go to $13,980 for this one server under vSphere 5.  One forum case, which is probably more than up for debate by the company, noted that the effective price increase was 380%.  ZDNet showed a change to this policy, but the damage may have already been done.  When customers push back it can create a more difficult future for relations.

Here is where this all gets interesting.  Analysts have been stepping over themselves to raise the ratings on VMware.  In the middle of August alone, there have been analyst upgrades by Barclays, CRedit Suisse, FBR Capital, and Collins Stewart.  Wells Fargo also upgraded the company in early August, based on the pricing power.

The big challenge here is EMC Corp. (NYSE: EMC) due to its super-majority ownership position in VMware.  While it may not meddle in pricing, it will certainly meddle if the business gets interrupted or if the image gets bashed too much.

This also opens the door for Citrix Systems, Inc. (NASDAQ: CTXS) and its Xen virtualization, although you might not know it if you see that Citrix stock is close to a 52-week low.

Netflix, Inc. (NASDAQ: NFLX) is a night and day different company than VMware.  Comparing virtualization to video rentals might be too odd, but what is not different at all is the pricing structure changes and the fallout that can come from it.  Netflix has lost almost one-third of its value since its latest “price structure change.”

The selling of stocks has also been extremely tough on VMware,  Since the mid-July peak above $110.00 per share, VMware has fallen to under $78.00.  That is probably the market more than pricing, but it seems as though there is a longer-term risk here that investors are trying to grapple with.

Analysts on Wall Street may cheer pricing power all day long, but a customer revolt may bring an opposite outcome.

JON C. OGG