ANALYSIS: Opportunities in the LatAm virtualization market

- Wednesday, March 5, 2008

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Virtualization is considered by several independent IT firms and consultancies as one of the main areas of IT investment in Latin America for 2008, leading to claims that this will be "the year of virtualization."

Although the level of virtualization projects is not as high as in developed countries, Latin American companies are more aware of the benefits of this technology today, and consequently are investing in both testing environments and productive areas.

But considering it is a relatively new technology, and as traditionally happens with new solutions, there are certain industries and countries where growth will be consistently higher.

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ONE OF THE TOP TRENDS IN THE REGION

IDC estimates the Latin American virtualization market was worth some US$17mn in 2007, but will record one of the highest growth rates in the region's IT sector. In fact, this market was worth some US$3.5mn in 2004, when the first virtualization projects took place in the region, and increased almost five times by 2007.

The consultancy believes this segment has the potential to more than double its value in the next three years, reaching US$52mn by 2011, IDC analyst Lídice Fernández told BNamericas.

"The use and adoption of virtualization technologies has matured considerably. There is an important part of users in Latin America testing virtualization without implementing it in productive areas, but we believe nearly 11% of the total investments in virtualization during 2007 were to guarantee the availability of resources under a virtualized IT architecture," Fernández said.

According to Hugo Espinoza, Southern Cone director at US enterprise access solutions provider Citrix Systems (Nasdaq: CTXS), "the main driver of virtualization projects was initially the search for economies of scale or cost reduction. But the truth is that today virtualization projects, especially those related to application virtualization, aim more and more to deliver IT services to users in a more flexible and dynamic way, with a much faster response time."

Another driver of growth in this area is the need to free up financial resources to dedicate to innovation areas instead of mere operating expenses. Werner Corrales, technology infrastructure manager at the Latin American unit of Microsoft (Nasdaq: MSFT), believes that on average, companies use 80% of their IT budget in operational expenses and 20% in innovation.

By diverting resources from maintenance to innovation, companies can develop state of the art technology that gives them a competitive advantage in their industry, Corrales said.

NOT FOR EVERYONE

A key criterion behind the decision to implement a server virtualization project is the number of servers that a company depends on. According to Fernández, the more servers there are the higher the benefits a company gets from deploying a virtualization project. For example, when talking about 100 or 200 servers a virtualization project can lead to clear evidence of reduced costs, in terms of administration and energy savings.

IDC statistics show that the consolidation rate of any regular virtualization project is four to one, which means that with one virtualized server a company can run the same processes as four traditional servers. But in large data centers, the rate can be 10 to one.

Consequently, virtualization is more suitable for large companies, particularly those that have extensive IT infrastructure and need to improve the capabilities of currently installed services. A point to consider is that any increase in data center capacity is expensive both in terms of acquisition of infrastructure and heat dissipation.

Still, virtualization is not expected to undermine server sales, since the SME space will continue acquiring traditional servers. The infrastructure they need is not large enough to require a virtualization solution.

According to Corrales, less than 3% of all servers sold in Latin America are being used in virtualization projects, but within three years, more than 15% of servers will be in virtualization projects.

However, virtualization does have a role in the SME segment with respect to applications, as a way to gain competitive advantages that will allow them to substantially grow their business and compete in a global market, Citrix's Hugo Espinoza said.

"[The ones looking for application virtualization] are those that have an operational complexity when administrating their software applications and a diversity of users. [But it is] still mostly large corporations that have a heterogeneous software environment and need to provide access to third parties, partners or employees," Espinoza added.

Another area of virtualization that is gaining interest in Latin America is client virtualization, where a device similar to a thin client connects an employee's monitor, keyboard and mouse to a server that hosts all the information needed, with no need for the employee to have his own CPU. Although this is not a massive technology in Latin America yet, one of the main advantages is reduced hardware infrastructure costs and faster set up time for adding a new user to the network, since the administrator only needs to open the session in the server.

US technology firm NComputing is one of the players in this segment and foreseeing how attractive the Latin American desktop virtualization market will become, the company has recently opened an office in Mexico, which will serve as its headquarters for operations in Central and South America.

AREAS OF OPPORTUNITY

As previously mentioned, virtualization is more appropriate for firms that maintain a large data center or extensive server infrastructure, and as is traditional, the "early adopters" are companies in the financial and telecommunications industries. However, IDC also believes consolidation in the retail market, particularly in the Southern Cone, will also boost investments in virtualization technologies.

In some countries the manufacturing sector also stands out. "This is the industry that most suffered after the 2001 crisis and is today recovering, but for that they need to restructure their operations in order to gain efficiencies. And virtualization fits perfectly well there," IDC's Fernández said.

IDC expects Brazil and Mexico to account for the bulk of investment in virtualization, mostly considering the larger companies are there, including the banks with the largest number of transactions, the largest telcos and the biggest oil and gas companies.

"Latin America is no longer investing only in infrastructure and is now investing in adding value to that infrastructure. That was the main change made in developed countries such as the US and those in Europe. We are seeing virtualization as a central component of the business," Espinoza added.

Corrales agrees with this idea, adding that globalization of the economy and the increasing number of countries or trade blocks signing free trade agreements is also a driver of virtualization technologies, as companies need to have a more agile business environment in order to compete not only with firms in their own country but also with global providers.

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