 Live from San Francisco, California, it's the Cube at VMworld 2014 brought to you by VMware, Cisco, EMC, HP, and Nutanix. Now here are your hosts, John Furrier and Dave Vellante. Hey, welcome back everyone here live in San Francisco, California, VMworld 2014. This is the Cube, our flagship program. We go out to the events and extract the soup from the noise. I'm John Furrier with my co-host Dave Vellante. Our next guest is Bill Fathers, EVP and General Manager of the Hybrid Cloud Business Unit at VMworld. Welcome to the Cube. Well, good to see you again. Thank you so much. So how are you feeling? Holding up? Keynotes, the Hybrid Cloud is hot. Yeah, it's fantastic. I mean to have 25,000 clients come and see you, it's just what a great privilege it is. Fantastic. DNF and DNR customer visitor, we appreciate you spending the time with us and get that signal out there. So I've got to ask you, obviously, the vCloud, strategic, no real change in direction, straight and narrow, get that out there. New name, AIR, comes in there, helped the branding. We talked a little bit about that with Robin and Pat and Carl. But what's under the hood? Yesterday was an under the hood session. Give us the update of where it's all being filled in, where's the innovation? Obviously Docker adds a little bit more new stuff to it, OpenStack is certainly nice in there. It's all kind of coming together. Yeah, that's it. I'd say you could put the announcements in the last few days and a few different buckets. The first one is around making it easier to consume, making it available on demand, which overwhelming feedback from clients is they want to be able to consume this instantly and then pay for it as they go, as well as having the option to have as a subscription. A new DevOps tool, which allows the clients to use their existing DevOps tools to plug into the platform, and they just rich a set of value added services like databases as a service and a new object storage platform. We were talking to Carl yesterday, talking about how Pat has a new management team. Everyone's got their own little kingdom operations back office. Carl go to market M&A, Pat, I'll see you digging in everywhere. And Dave and I were talking just this morning about the Royal Philips has this huge transformation project going on where they're literally having people sign cloud consumption contracts. Fantastic. So this speaks to this new consumption model that really is not a, you know, I'm back the truck up and I'm stuck with VM, where it's literally paid by the drink across the board on a global scale. How do you reconcile that trend that's happening with the road map and the business unit? Because that seems to be the preferred consumption model. How do you attack that? Yeah. Exactly. There's going to be a point in the not too distant future where VMware's default business model is going to be cloud services. And there'll be a point in the future where we don't launch ESX as an on-premises software product straight away. We launch it as a cloud offering, first of all. So perhaps, I don't know, ESX 7, 8, whatever it will be. We'll say, look, it's cloud first. It's available as a cloud offering. And then we'll be able to make it offering as a professional software. So, I mean, sometimes it's hard to read because you look at it, past is not prologue, right? So last quarter, I think ELAs were, I don't know, 38% of total revenue. I don't know if that was the highest ever, but it was up there. I know they're kind of lumpy. What should we read into that? Because I think you guys have said, look, subscriptions is the future. Are you seeing sort of a general trend in the customer base? Because we see it in pockets, right? The guy from Phillips said, that's it. The only way that we're consuming services now is on demand by consumption, by the drink. So we've been waiting for the sort of ELA trend to attenuate, but it seems to go in the other direction. Help us read through those tea leaves. I would say two things. First of all, without question, the last six, nine months, there's a big shift. An acceleration of enterprise is now saying, yeah, okay, it is about public cloud. We're now entering a professional era of public cloud adoption. And the rate at which growth is coming now into public cloud versus on-premises has taken a sort of step change. The second thing is that clients are going to consume both on-premises and cloud-based. And therefore, having a commercial model that allows you to give the clients the flexibility to be able to consume on-premises and in the public cloud and have the flexibility to flow back and forth, sort of almost a hybrid licensing model, that's going to be where I think we have to focus. And VMware management early on recognized, okay, one of the reasons why guys like Amazon and Google have such success is this high degree of homogeneity. And so you went out with the partner strategy, which is a good one, because you get great reach, great global distribution, but it's hard to manage and hurt all the cats. And so it just didn't seem to be happening fast enough, so you announced, you know, vCloud Hybrid Service now air. But there was a lot of confusion around that, okay, what's VMware's motivation? Are they going to compete with us? And you've spent a lot of time saying, no, guys, this is really about us, you know, showing the way, transferring, you know, knowledge. So I wonder if you could sort of update us on the sort of relationship with the perception of the service provider partners? Yeah, that's an excellent question. And you're right, this time last year, as we entered the market as a service provider and said, we will be commercializing this stack to enable you to make more money. Rightly, service providers said, yeah, that sounds good, but let's wait and see if you actually do that. So I think we're now actually doing it. And I think the value out here is we develop a service like Disaster Recovery as a service. It's our fastest selling, fastest growing bit of value out on top of the platform. We're now also making that available to all of our service provider partners. They're instantly going to be able to monetize that value added service and sell it into their client base. And we're going to see their revenues grow as a result of us passing that. The previous approach was a bit more, we want to sort of try and define the architecture you should build it to and a sort of architectural approach. We're saying that shouldn't be how we prescribe this. It's about how we can help them make more money quicker. And by giving them value added services like desktop as a service, DR as a service, they can quickly monetize their investment. And because we're obviously educating our entire client base on DR as a service, so again that helps. So you understand the economics of cloud better than I do. So help help me understand it in terms of the operating leverage that you get with that model compared to say somebody like an Amazon or a Google or an Azure that sort of owns all the infrastructure, owns the distribution channel points. Can you replicate the sort of marginal economics of those models? And if so, how? Help me understand that. Yeah, our blended model is sort of very, it's sort of, it's great. So we are a service provider in our own rights. And as you say, you get economies of scale, but you're basically operating a large scale infrastructure. We're also now commercializing that same stack and making it available to our network of partners. And obviously that's not capital intensive and generally enjoys far greater margins. So having the blended model of both being a service provider and empowering an ecosystem gives you vastly better economics overall than just being an Amazon or just being Azure, if that makes sense. It gives you better, I understand why it gives you better flexibility. And expand your TAM, why is it better economics though? I'm missing that. So the business model where we're empowering service providers, obviously we're not deploying any capital. What we are doing though is making available the software that we've already built. I understand, yeah. Okay, that's the leverage right there. But so, okay, let me translate that question to the service provider. Can your service provider partners get that kind of operating leverage necessary to compete with an Amazon and a Google? Because ultimately that's what they have to do, correct? And they can. And having been a service provider for eight or nine years, what we're basically doing is taking away from them the overhead of R&D. So we're saying, look, this would have cost several hundred million dollars to develop a DR as a service capability that's this advanced. And we're basically making it available to them on a rateable business model. Service provider as a service. Yeah, that's good. That's very good. And people always talk about the race to zero. Why is it not a race to zero? I personally don't believe it is, but I'd like to hear your thoughts on why it's not a race to zero for your partners. Yeah, oh, for the partners. Yeah, okay, I think two things. One is this compatibility. So as they're able to present to our clients a genuinely compatible hybrid offering, that's very valuable. It avoids a huge amount of cost that the clients would have to spend on things when they're working with heterogeneous clouds. So there's real value they're being created for clients by having a hybrid offering. The second, of course, is it will pull through a huge amount of other value added services. Eight out of ten clients don't just want public cloud, they want managed private cloud as well. They probably want some network and they may want some application services support. So it's a huge pull through. So Bill, I want to switch gears and talk about market forces. So last year Pat came on and said, ah, contain, it's been around for a long time. Now Docker is now on the scene. Certainly it's a very fluid marketplace in terms of market forces. So what did the brain trust for VMware last year learn? What did you guys learn from last VM world to this VM world? And what forces were at play that made you guys make such quick changes? You guys have been pretty aggressive offensively, making some quick decision making. So what did you learn from last year that transpired within VMware and said, hey, okay, we're going to do that. We're going to do that and let's solidify this core tech. What was the big thing? I think two things. First of all is obviously we said hybrid and quite rightly people would have said that's a bit self-serving VMware because you've got a huge install base of clients. So it'll certainly suit your purposes if hybrid pans out to be the right strategy. I'd say we found there's real value. Hybrid is real. You just got to execute on that plan. The second thing is openness. Clients just don't want to be locked in. They're saying, look, this new era is not about proprietary stacks. Give me freedom to be able to use things like open stack and container technologies. So obviously we looked very carefully and said, is there a genuine value proposition where we can say run containers on ESX. It is going to be better than if you just run it on bare metals. So you have the enablement piece still locked in for you guys enable in the customers. Okay, so let's bring up, we bring up the whole mainframe operating system. We love to riff on the whole OS vision of the system being the cloud. Yeah. Stateless applications work great with Docker. You know, applications work loads of driving everything. Now you got state. Yeah. So state versus stateless. Still an open book on state. What's your comment and help us understand how you guys look at that because it seems like you guys can bring a lot of value to that piece of, hey, you want to run REST and APIs, no problem. That's it. You want to write code, no problem. But now that some issues are on state. That's it. So talk about what that means and how you guys will win there. From our perspective, it's about giving clients the opportunity to do both. But on the same hypervisor, state and stateless and be able to manage both environments with a common set of tools. But it's not mutually exclusive. You need to have both to run an operating system. And I think what we're saying is we're going to be neutral in that particular battle and say what we will do though is give you the flexibility to do both in the same environment. Yeah, great. I think it's great. No one really has been talking about this whole state piece of it. I think it's a real opportunity. So I'm getting the hook here because I know you've got other things. Really appreciate your time. But I want to ask you, shooting the arrow forward this year, what market forces are you watching carefully as you guys continue to stay the course? I mean, you guys are on the straight now, a little bit of a zigzag here, but pretty much a straight and narrow with the company, you know, hybrid, SDDC hybrid and then user computing. What is the pressure points that you're watching in terms of market forces? Yeah, I think, you know, the strong focus on mobility and need to be relevant to enterprises as they're developing next generation of mobile applications. We have to be relevant to enterprises to capture that workload. And that's something I'm certainly focused on a great deal. So I can capture that area of net new development. So I got to ask you the final question and the segment. Pat said, you know, because I was teasing Pat, are you playing defense or offense? And I knew I was getting the rides out of it because Pat's not enough defensive play. No, a lot of people don't know he was real part of that Intel 46 when Pat is definitely an offensive player. Yeah, in front of that wave. And that's it or your driftwood is his famous quote on the cube. Yeah, what is the offensive strategy for your business unit? And then we'll end the segment. That's it. I think it's to become the dominant choice for all cloud providers around the world. And our strategy of being a service provider that enables an ecosystem is going to be a key. That's a killing value proposition. Now that's the offense, right? That's the offense. Okay, Bill Fathers here inside the cube EVP of the business union. GM of the business union of the hybrid cloud. Certainly a strategic business union for VMware. This is the future. This is the cube broadcasting live here in San Francisco at VMworld 24th. I'm John Furrier with Dave Vellante. We'll be right back with our next guest after this short break.