The VSPP Challenge: Licensing the Public Cloud

Updates: I’ve had a couple people ask about my use of v1, v2 etc…  I used those versions based on an e-mail from VMware and from my experience with the program as a customer.  I have been sent examples of a 2007-era VSPP contract that shows an “Enterprise” and “Starter” version with a cost of $36/$12 (no point system yet) which looks like it could be a true “version one”.  With that said, I’m going to go through the post and update the version numbers to reflect my new understanding of the program, with v1 starting in 2007 and predating the point system, v2 starting in 2009, v3 coming in 2010 and v4 being the most recent version announced at VMware Partner Exchange in February of 2011.  Thank you to everyone who sent me examples of the early contract.  Please (please) leave your comments below, I think they will help move the conversation forward!

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Full disclosure: I work for the VCE Company, and VMware is one of our financial backers, along with Cisco, EMC and Intel.  I work specifically with our Service Provider partners and customers now, and previously worked for a Service Provider, so this topic is one that I’ve been involved with for over two years and one that I end up discussing at length (and sometimes volume) with VMware.  With the release of the 3rd 4th version of the VSPP licensing program, I wanted to take a quick snapshot of where the program stands now, how it got here and what issues still remain.  While the description of the timelines and details of the program and its evolution are objective, all of the commentary below is mine alone.  I do not have any non-public insight into any licensing plans, and my perspective is one of a former customer and current partner who has a vested interest in the Service Provider space, specifically as it relates to the Vblock infrastructure product we offer.

VMware has created, and for the most part overcome, a number of obstacles on its way to becoming a dominant player in the enterprise.   Licensing, it seems, has always been somewhat of a thorn in the side of the software company.  There have been a number of changes to the perpetual licensing side of the house over the years, both on the packaging of the licenses themselves as well as to the support that accompanies them.  Part of the changes have been due to VMware responding to the increasing ability and willingness of customers to drive higher and higher VM densities; when a 1U server has gone through a 4x increase in processor cores and a 24x increase in addressable memory, changes are going to have to be made to maintain a revenue run-rate.  Much the same way that server manufacturers have had to respond to the reduction in servers required in the enterprise, VMware has had to respond to the reduction in VMware licenses needed.  Some of that can be done by branching out into other parts of the software stack, but vSphere licenses are the flagship product and a bellwether for the company.  VMware certainly isn’t the only company who has had to make mid-course corrections to their licensing model and pricing; all software companies from Oracle to Microsoft have to make them as well!

As we go through this discussion and look at how the program has changed, I’m going to ask you to keep two different reference customers in mind:

1)      Customer #1 is a large enterprise customer.  They have a 32 host cluster comprised of dual-processor servers.  They are supporting 600 VMs in this environment, with a 20:1 consolidation ratio including N+2 hardware.  The VMs are being used to virtualize Tier 1 apps in addition to internal and custom apps, and the average VM has 1.2 vCPUs, 4.5 GB RAM and 85 GB of high-performance disk.  They provide these VMs to 50 internal business units, using Chargeback and Orchestrator to enable the end-user.  They logically separate out the individual “tenants” for security and compliance, and they allow their consumer to pick what level of functionality/SLA/performance that meets their business needs.  The IT group is a profit center, or at least is using the Chargeback functionality to break even on the cost of the platform by recovering “revenue” from the business units.

2)      Customer #2 has the same cluster, supporting the same number and size of VMs.  They use the same vSphere software and the same revenue recognition process as customer #1.  The only difference is that customer #2 is a Service Provider and the 50 “customers” they are serving are external to the company instead of internal business units.

What is the VSPP program?

The VMware ESX/vSphere EULA has always forbid “reselling” the licenses, which precluded Service Providers from offering an IaaS product by the letter of the law.  Fortunately for the SPs who were in that line of business, VMware was relatively free with granting exceptions to that EULA, usually requiring at most an ELA, and in most cases just a phone call.

Edit based on reader feedback- In 2007 the first real version of the VSPP program was rolled out in limited fashion.  It included an “Enterprise” and a “Standard” tier, and obligated the Service Provider to a 50-VM commitment.  End edit

In late 2008 VMware started floating the idea of a “VMware vCloud for Hosters” program, which would allow hosting providers to “rent” licenses rather than having to front the capital for perpetual licenses.  Microsoft had been offering much the same model to their hosting providers through the Service Provider License Agreement, which had become a defacto standard in the industry.  Hosting providers were contacted to gauge interest, although the details of the program were very much in flux.  The traditional VMware sales teams immediately started howling, since this effectively removed a very high-growth set of customers from their territories.  It was communicated to me directly that the VSPP model and program roll-out had circumvented most of the VMware sales organization altogether, and that there were minor (and not so minor) revolts going on internally.  We were told by a national-level VMware sales executive in early 2009 to continue using our perpetual license model and to check back in after 12 months to “see if we’ve got this damn thing fixed yet.”

OK, so there were some birthing pains.  What did the final product look like?

At VMware Partner Exchange 2009, the VSPP model was formally rolled out to the service provider partners.  The idea was simple: any public-facing, multi-tenant environment would be licensed per VM, not per processor.  Pricing would be tiered by the licensing level of the cluster (Standard, Advanced, Enterprise Plus), would include platinum support and would use a point system where the value of a point was determined by the number of points included in the customer’s subscription.  The entry-level was 1200 points, and the largest plan that was publicly referenced was 18,000 points, with the base cost of each point (retail pricing, if you’d like…) being $1.00. 

At first, the program only covered straight ESX.  ESXi (then in its infancy) wasn’t included, nor was SRM, View or any other product.   Another significant change made with the roll-out of this licensing platform was that the customer would no longer be purchasing licensing directly from VMware; the concept of a “license aggregator” was pushed out and that was the only way to participate in the VSPP program.  I believe that Insight was the first of the US aggregators available, with others joining the program later.  While the aggregators have done a good job overall, Service Providers definitely felt the pain of being disassociated from their local VMware sales teams.  It became hard for the guys who were being paid to sell perpetual license to spend a lot of time with SPs who weren’t buying them anymore.

OK, that sounds reasonable, what’s the issue?

The initial problem with the VSPP v1 v2 program was that it was very unbalanced in the value it provided to an SP based completely on the consolidation ration that was being used.  If you were an SAP hoster who was putting 4 VMs on a server and allocating those VMs a huge amount of resources, the VSPP program was a huge benefit.  Instead of paying ~$5,000/processor for a perpetual license, you could pay $144/mo for the vSphere Advanced level, and that was a huge difference in cost.  On the flip side, if you had an IaaS product where you were putting 50 VMs on a single server, your costs went from $10,000 one-time to $1,800/mo, severely impacting the profitability of that service long-term.

There was definitely an upside for the SPs overall, however.  License costs could now be tied directly to revenue, which was easier, both from an accounting standpoint (OpEx vs. CapEx) as well as from a modeling standpoint.  Every VM sold was going to include a specific amount of licensing overhead, and especially for SPs who were coming into the program new, this was comparable to the Microsoft SPLA program they had been using to that point.

The big challenge that VMware faced with VSPP v1 v2 was explaining the difference in cost to Service Providers who were currently using the perpetual license model through an EULA exception.  If you think back to the two customers I defined earlier, let’s look at the pricing.  Customer #1 was how the SPs looked before VSPP.  In this environment the 32 hosts are licensed with perpetual licenses and both the cost of the licenses and the support is known out for up to three years.  It doesn’t matter how many VMs are provisioned, what workloads those VMs support or who uses them, the licensing is simple, understandable and predictable.  Add a new host server?  Add two new processor licenses.  If we use an average cost of $5,000 per processor license (Enterprise Plus including 3 years of Production support) we would have a total cost of $320,000 (not counting vCenter, etc…) to support this environment regardless of VM count, VM size or workload supported, so long as the number of processors in the hosts didn’t change.  From a business standpoint, this meant that an SP using perpetual licenses could directly affect their margins by choosing to increase (or decrease) the risk they were willing to assume.  If you could generate $7,500/mo in revenue out of an infrastructure stack with a fixed capital cost using a 25:1 consolidation ratio, all you had to do in order to increase the revenue recognized was increase the ratio.  There was no change in the cost, just in the revenue.

Now, think about Customer #2, the Service Provider.  Same cluster size, same number of VMs, same number of customers, same provisioning discipline and same workloads being supported, but a very different licensing landscape.  With the VSPP v1 v2 model and assuming the cluster was licensed with Enterprise Plus, the cost of this environment would be $21,600/mo for a 36 month total cost of $777,600 ($36/VM*600 VMs*36 months).  I’ll let that sink in for a minute…

Holy cow!  OK, I see the issue, but it was a v1 early stage program after all, so VMware has made changes, right?

The VSPP program stayed more or less the same through the remainder of 2009 until VMware Partner Exchange 2010, when it was revealed that the licensing model would be changing again.  This time, instead of licensing the software per VM, it would be licensed per GB of vRAM allocated to each VM!  The pricing model now included Standard ($5/GB) and Premier ($15/GB) levels, with vCenter, vCloud Director and Production Software and Support included with each level.

Especially with the increased push to virtualized Tier 1 applications, moving the pricing model to a RAM-based cost structure seems like a cruel joke.  The practical response by most service providers was that they immediately renewed their existing VSPP agreement with their aggregator for another 12 months, pushing off the impact of the changes for another year (this is actually still in progress:  I’ve had SPs tell me that they have until March 31st to renew their “per VM” contracts).  Because the VSPP agreements are limited to 12 months in duration, this is really all that they could do to protect themselves.  Legally locked out of continuing to use using the perpetual license costs that they had built a business model around (there was an “amnesty” program introduced which would allow existing licenses to be retained, but it amounted to little more than a temporary delay in moving legacy hosts to the new platform) and having had their licensing/costing model changed drastically twice in as many years, Service Providers started having hard conversations about whether it was practical to move forward with VMware.  Even if the costing model made sense at the time, who’s to say that it wasn’t going to change again in a year?  How do you make that work from a business standpoint if your customers are signed to multi-year contracts?  Do you build in the ability to pass on additional costs to them?  Do you eat the cost difference and take the hit to your margins?  It’s important to note that VMware wasn’t basing the pricing on the amount of RAM used, they were basing it on the amount of RAM allocated, which when talking about an IaaS product makes a huge difference.  Customers who are virtualizing for the first time, especially in a production environment, tend to over-allocate RAM because they are naturally skeptical.

Let’s look at our two reference customers again. Remember the $777,600 CapEx cost that Customer #2 was incurring as a Service Provider?  With VSPPv2v3 the OpEx cost has now risen to an astounding $1,458,000 ($15/GB of vRAM*4.5GB vRAM*600*36) which is 2x the cost of VSPPv1v2 and 4.5x the cost of the perpetual licenses that the Fortune 500 company is using to deliver the exact same resources, in the exact same way to the exact same number of customers using the exact same versions of the VMware software.  We are also assuming zero growth in the environment over three years, either in the number of VMs or in the vRAM provisioned, both of which would be very bad things for a service provider.   If you aren’t growing, you are dying, and growth using the VSPP model equates to a linear increase in license cost on top of your product costing.  Every VM you sell is going to have the licensing cost taken directly off the top, regardless of situation.  Need to spin up VMs to enable a customer migration?  Want to allow a customer to create a cloned VM to test application performance?  All of those things that used to be able to be done for free now had a cost associated with them under VSPP v2 v3.

OK, VMware employs a bunch of smart guys, what happened when you showed them this data?

As a VMware customer (and HUGE VMware fan) I tried to take my concerns up the ladder.  I have had direct conference calls with the team responsible for the pricing models, but I’m not sure that my message got through.  When I showed them, as a Service Provider customer, that we had seen our allocated RAM jump from an average of 1.25GB/VM to 4.5GB/VM over the three years our platform had been in business, and when I showed them what it was going to do to our business model, I was greeted with silence.  When I asked what the reasoning was for the changes, I was told “VMware is enabling this business model, and we deserve our piece of the revenue” and “we (VMware) are sharing the risk, and we deserve to share in the profits”.  I didn’t even know how to respond.  To be clear, VMware is in no way sharing in the risk of standing up, selling and delivering a public or private cloud service.  They aren’t making a capital investment, they aren’t driving business and they aren’t making good when SLAs aren’t met.  They are enabling those services, but there’s no shared risk.  They are incurring risk from a business standpoint, because the move from a perpetual license model to one that collects revenue incrementally is a big change, and one that (especially when done without a lot of involvement from the existing sales team) can cause internal issues.  Across the board, customers understand that there’s a premium for a license leasing program.  Whether it’s Microsoft, CommVault or any of the other software companies that offer such a program, the cost over time is always more expensive, if only to mitigate the risk that the customer may scale down their license usage at any time.  That being said, there is a rational limit to what that premium can be, and 4.5x the cost of the perpetual licenses seems very, very high in my experience negotiating these kinds of contracts.

In October I moved over to my current position with VCE and have had conversation after conversation with SP customers who have been upset with the changes in their cost model.  I have reached out to the VSPP team to get more information about where the program is headed because I don’t like to just point of problems; I want to be part of solutions.  I spoke with both James Deaton and Kedra Simm at the VMware Partner Exchange conference earlier this month, and there’s definitely changes happening based on partner feedback.  Unfortunately I wasn’t invited to the partner-only advisory board meeting, but based on reports from people who attended it wasn’t hard to get people to voice their frustrations.  Hopefully VCE will be involved in these discussions in the future.

VSPP v3 v4 is on the horizon, and there are some changes in store.  First, there’s talk of capping the cost of a VM at 8GB of RAM.  For those low-consolidation rate customers who had it so good early on, (and who were the hardest hit with the move to v2…) this will reduce their costs somewhat.  Another welcome change is that there will be a formal “trial” program that will allow SPs to do migrations or Proof of Concept setups for their customers without incurring any cost.  The “sandbox” provided is limited, but at least it’s a move in the right direction.  Also good to see is the inclusion of many, many more products in the program.  View, ThinApp, Zimbra, vFabric, Spring, Hyperic, SRM, Heartbeat, vShield and Capacity IQ are all available in the near term, and that group will expand over time.  One big addition to the program is the inclusion of vCloud Director as a free option with both the vCloud Standard and vCloud Premier levels.  This should help drive adoption of vCD as a front-end to the public cloud environments and has been very well received by Service Provider customers that I’ve spoken to.

Unfortunately there hasn’t been much progress on the pricing overall.  Looking at the VSPP v3 v4 points/price list (which I’m not sure is public yet, so I won’t detail here) the costs still seem disproportionately high.  Other than the possibility of capping the cost at 8GB (which doesn’t appear to be formally included in VSPP v3 v4 as of right now), there isn’t any change significant change  in the base VM cost.  SPs are still looking at a 4.5x cost difference between their internal and external cloud platforms.  There has been talk of increasing both the length of the VSPP contracts as well as the limit of the number of points that can be included on a contract.  Both of these may introduce more ways for customers to negotiate their individual point cost, much the same way an ELA would let you reduce your perpetual license cost.  I have seen VMware be very, very aggressive with their point pricing, especially with SPs who have been involved with the program since the early days.

How can I prepare for my own VSPP negotiation?

For those of you who are preparing to enter into these negotiations, I would suggest that you have all of your data together!  Find out what the perpetual license cost would be for your environment over three years.  Trend your customer resources growth over as long a period as you can to determine how your costs are going to increase over time.  Find out how Microsoft is licensing their hypervisor product.  Work with your controller/finance people to find out what is going to need to be done to your customer pricing in order to accommodate this new license model.  Don’t be surprised later at the impact this is going to have, and make sure to take care of your business model first!  Take all of the data you’ve collected and make sure you present it to your VSPP rep in a logical, methodical way.  Explain how you make money.  Have a point value in mind that you need to get to in order to make everything work.  Stick to your guns!  VMware has a lot riding on the Service Provider community, not just on the IaaS side of things but also on the emerging SaaS (Zimbra, etc…) and PaaS initiatives (Spring, Hyperic, etc…), so you can influence things more than you may think.

For my part, I’ll keep pushing.  VMware is, hands down, the best technology on the planet for building, delivering and managing these kinds of products, whether they are public facing or internal, and I refuse to accept that licensing plans are written in stone!  I don’t begrudge VMware maximizing their business value, but I’m not happy that (in this case), that’s being done in a way that seems to place an undue burden on Service Providers alone.

As always, courteous comments below are always welcome (with full company disclosure, please).  I’m not an employee of VMware, and my “official” knowledge of VSPP v3 v4 is limited just to what’s in the public domain and what’s been shared with me by VCE customers, but I’m happy to answer any questions I can.
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