The imminent launch of XenSource's first commercial open source solutions will kick off commoditization in the virtualization software market and threaten VMware's bread-and-butter revenues, observers predict.

XenSource, the Palo Alto, Calif. startup that also oversees the open source Xen project, will launch its first management and automation solutions based on the open source Xen 3 virtualization engine within weeks, said Simon Crosby, founder and vice president of strategy for Xensource.

For XenSource, the Xen virtualization engine is a free platform service on which other value-added solutions can be built. Microsoft has the same notion and also announced plans earlier this year to integrate a virtualization hypervisor into the Longhorn Windows Server R2 in 2008.

Crosby said more servers aren't running virtualization because VMWare's flagship ESX product is too costly. "We can rapidly accelerate adoption of the virtual enterprise if we have the best hypervisor that is freely available," he said. "It will create a huge market for solutions offerings around it, commercially supported offerings that we can build can build an ecosystem around."

To that end, XenSource plans to build a strong channel program for ISVs and service firms and will try to avoid the portability problems Linux distribution vendors have encountered by offering a certified single Xen code base upon which all development will take place, Crosby said.

Commoditizing the virtualization engine is good news for customers but not necessarily for VMware, whose ESX server, introduced in 2001, transformed the tiny firm into a multi-million dollar empire acquired by EMC for more than $600 million early last year.

XenSource announced its formation and $6 million in funding last January. Its co-founders include Crosby and Ian Pratt, who is the Xen project leader and a senior faculty member at the University of Cambridge Computer Laboratory.

"Xen is the biggest challenge to VMware coming over the next year, the first real challenge to VMware in the hypervisor market in the x86 market," said Tom Bittman, a vice president and fellow at Gartner Group. "I don't think Xen will take over the world, as it will be less mature initially, but it will be on the table."

Xen is having broad repercussions across the industry. Since going public earlier this year, VMware has responded by pushing forth a platform based on open standards.

Microsoft formed a pact with VMware competitor SWSoft and last week announced significant licensing changes that address how virtual workloads will run on Windows, even as it prepares to integrate hypervisor technology into the Windows server by the end of the decade.

The introduction of XenSource's commercial solutions puts VMware's OEM partners in an uncomfortable position, said sources who declined to be named.

While Linux backers IBM and Hewlett-Packard have embraced Xen publicly, executives from the server and services divisions from those companies don't want to disrupt the lucrative flow of revenues that come from their respective VMware practices, analyst and partners agree.

Xen is no hollow threat. Over the past year, the Xen open source project, which Xensource founders oversee separately, has received backing from virtually all of the major players in the industry including Intel, Advanced Micro Devices, IBM, HP, Dell and the entire Linux community.

Linux distribution leaders Red Hat and Novell, for instance, are integrating the Xen engine into their next generation Red Hat Enterprise Linux 5 and Novell SUSE Linux Enterprise Server 10 servers, due to ship in 2006. The kernel.org led by OSDL fellow and Linux creator Linus Torvald is implementing core aspects of Xen into the Linux kernel.

Initially, Xensource will go to market this quarter with Linux and open source solutions but Windows solutions will be offered in the first quarter of 2006, Crosby said. In August, the company demonstrated Windows XP running on Xen using Intel's Virtualization Technology extensions. XenSource will also run on AMD's "Pacifica" virtualization technology due in the first half of 2006.

Even as VMware pronounces technical superiority over Xen and a broad ecosystem of more than 1,000 ISVs and service partners, open source offerings tend to catch up fast, observers note.

The availability of Xensource's new management and automation solutions, for example, will likely force VMware to make pricing cuts on ESX and shift its focus on VirtualCenter and other value-added solutions to stay relevant in the long term, analysts note.

XenSource demonstrated at the fall Intel Developer's Forum its policy driven workload management solution for transactional enterprise applications, using the Xen hypervisor.

"It will be on the table in the same way that Microsoft attacked VMware's GSX server and they dropped pricing 44 percent," Gartner's Bittman said. "When Xen comes out, VMware will watch carefully and if they see any nip on their heels they'll be ready to drop the price on ESX."

VMware appears to be heeding the open source threat.

As it prepares to kick off its partner and user conference in Las Vegas this week, VMware launched on Monday its next generation ESX 3 that includes Virtual SMP and VirtualCenter Agent with VMotion live migration technology starting at a base price of $5,000. Virtual SMP and VMotion are sold separately. Currently, pricing for ESX server starts at $3,750 for a two processor server; $1,200 for Virtual SMP and Virtual Centers starts at $5,000.

In conjunction with partners, VMware also introduced on Monday new services for Capacity Planning and Consolidation that will be delivered from VMware directly and VMware Authorized Consulting (VAC) partners. VMware Capacity Planner is based on AOG's CapacityPlanner acquired by VMware earlier this year, sources said.

Additionally, the company is also extending its virtual infrastructure with advanced services for the server and desktop. VirtualCenter 2, also announced on Monday, features Distributed Availability Services and Distributed Resource Scheduling (DRS).

At the conference, VMware will push the concept of the Enterprise Hosted Desktop using ESX 3 to serve up secure virtual desktops.

Reseller made good margins from ESX sales in the past but VMWare effectively commoditized the server when it authorized Insight and CDW to sell the server, some partners note.

So for many VMware partners, the commoditization has already forced them to shift to VMware's advanced VirtualCenter 2 and VMotion technologies.

"The virtual engine is being commoditized and if Xen is another way to deliver it, then you need to layer on that and a key part of success is all the additional products being developed," said Mike Reilly, managing partner at Foedus, a VMware Authorized Consulting partner based on Portsmouth, NH. "The real value of this environment is the virtual ecosystem you can build around it."

Even as XenSource begins its assult on VMware, a Herndon, Va., firm called Parallel will launch in November a "lightweight" hypervisor for the desktop and early 2006 for the server aimed and priced for SMB customers.

VMware is becoming more channel friendly and plans to build a stronger army of channel partners to fight off incursions into its territory, partners said.

"They're worried about Xen and even built some para-virtualization into ESX3," said one VMware VIP partner who declined to be named. "VMware is learning to support their partner base and they have well meaning partner managers but it takes a while to change the culture," he partner said. "They're building it up slowly. It's only a small part of the organization that truly believes they need partners beyond hardware partners."