Warning:  This post is a bit more technical then many of mine and deals with my job (IT Infrastructure Architecture).  If that makes you want to run, that’s fine, no offense taken.  Tomorrow I will have a post on wooing technology companies to Pittsburgh.  If you’re up for expanding your brain a little you might graze the following Wikipedia articles before continuing:

• Coordination Game
• De Facto Standard
• Virtual Machine
• Microsoft Exchange Server
• Platform as a Service (PaaS)

VMWare today announced that they are purchasing Zimbra.  This, with some luck and other purchases like SpringSource, gives them a chance to move up from the infrastructure.  They can start offering services at the platform level.  For VMWare, the way to do this has to be through opensource development (Spring Source) and cheap office productivity (Zimbra).  They will never be able to compete with Windows/.NET/Office/Exchange at the platform level unless their solutions are MUCH cheaper.

We all accept this as a fact.  Even if Zimbra/SpringSource was a functionally better solution then Exchange/Visual Studio, we know they would get ZERO market penetration unless their price was several times cheaper.  The question I got to thinking about today was, why?  The answer comes from economics.  The technology industry has a coordination problem.   Because of this coordination problem we feel compelled to set up de facto standards.  Lucky Microsoft.  I spoke briefly about how an information bias in technology has lead to great inefficiencies (including the coordination problem) in a previous post.

Let’s think of a more common example of how a coordination problem has lead to a de facto standard, social networking.  The potential for a coordination problem is there because everyone benfits from a standard emerging.  How would you feel if half of your friends were on facebook and half on myspace?  This is part of the reason Myspace got crushed by Facebook.  Facebook may only have been a little better, but once a critical mass had moved to it, it became a de facto standard.  Then myspace withered and died survived on as purely a music site.

VMWare can avoid being trampled by a Microsoft monopoly here.  They will have to do something now, while they hold a position of power and Microsoft is still working to put together its virtualization and PaaS services (Microsoft announced today that it is partnering with HP to improve its PaaS).  The options that VMWare has are not too different than those that any company competing against a tech giant has:

1. Beat the Giant.  It’s not impossible; they have a huge head start.  Companies with a huge head start have done it to Microsoft before.  Apple failed once with PCs, but has succeeded with MP3 players.  Google still owns most of the search world in spite of Bing.  The risk here is that it’s all or nothing.  If they can keep the giant at bay then they get to be a monopoly player.  If they can’t, they end up like MySpace.
2. Become a niche player.  VMWare can, while Microsoft is still getting its feet on the ground, find a niche to occupy.  The most obvious would be the Linux/Java niche.  They can build high-powered software that focuses on enabling open office or Zimbra solutions and nimble, cheap development environments around Java.  They would target small and medium technologically savvy companies.  Of course, this would mean conceding most of their enterprise customers and focusing on a typically low-margin market.
3. While in a position of power, create a standard that allows both you and the giant to exist.  Instead of letting Microsoft become the de facto standard, create a mutually agreeable standard.  VMWare’s profits would suffer because it would make the service a commodity, but in the long-run it would keep either company from becoming a monopoly.