A series of recent encounters suggest a software development with substantial impact on the hardware business.

First, a professor of computer science at Georgia Tech called me to talk about virtual machines. He runs three operating systems — OS X, Windows and Linux — on an Apple MacPro, and uses his favorite tools from each environment, cutting and pasting seamlessly from Word 2000 running on XP to iPhoto running on OS X and so on.

Then I asked a friend who runs a department at a high tech marketing company whether virtual machines make a difference. “Are you kidding?” he said. “I used to buy ten PCs and ten Macs for a new team. Now, I get fifteen Macs and run them as PCs when necessary and I need fewer administrative resources.”

The success of VMWare proves that he’s not alone.

Next a consultant for 3Tera called. He had a hard time explaining what this early stage virtualization company does. The easiest part to grasp is “clustering.” They can link any number of servers together and treat them as a single virtual machine. Drain on CPU resources is minimal and managing the system is pretty easy.

The dramatic part is this: Their software can virtualize all the functions of a client’s network — take the firewall, the storage arrays, and other hardware and reproduce them in software. The client can tweak the system, then press a button and the virtual network propagates to the whole network. One of their clients is a large hosting company. The hosting company used to add one system administrator for every ten new servers; where 3Terra is deployed, it adds one for every hundred new blades.

Now consider this. Vanu makes a radio that runs in software for cell phone base stations. Bug fixes and upgrades can be deployed remotely to a carrier’s base stations.

What does it all mean? Clearly software is going to give more power to low-cost, generic machines. A complex device like a firewall currently needs much more than a CPU, but if it can be run in software on generic machines, then many markets now served only by high mix, low volume specialists might fall prey to the high volume ODM.

One limitation of virtual machines: The extra layer of software reduces performance — a hit of 5 percent to 7 percent on a PC. Manufacturers might respond to the competition by focusing on very fast throughput devices that cannot accommodate any reduction in performance. Other manufacturers might incorporate virtual machines into design for manufacturing programs, using virtualization as a way to reduce costs.

The trend to virtual machines, however, is likely to lead the hardware industry further toward thin margin, commodity business, especially in the computer and telecom infrastructure segments. It looks like software is hot on the hardware manufacturer’s trail, and they’ll have to sprint to stay ahead.

Posted by Matt Chanoff, October 19th, 2007

Filed to Outsourcing

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