Sources: Behind The EMC-VMware Soap Opera It Is Full Steam Ahead For Virtustream, vCloud Air On The Rocks

VMware is preparing to pull back on its vCloud Air hybrid cloud service in favor of a full-court press with the EMC Virtustream enterprise cloud platform, sources said.

In fact, EMC is moving aggressively ahead with the Virtustream cloud services initiative incorporating and aligning the service with VMware's software assets and the EMC Infrastructure business, sources said.

The Virtustream push comes after VMware Monday disclosed in a Securities and Exchange Commission filing that it will not participate in the formation of the Virtustream Cloud Business that it had agreed to be part of just two months ago.

EMC acquired Virtustream for $1.2 billion in July as the center piece of its cloud strategy, with Virtustream CEO Rodney Rogers leading EMC's cloud business going forward.

[Related Story: Partners: VMware Waving White Flag On EMC Virtustream Venture Creates Cloud Chaos]

"Over time, VMware is going to de-emphasize and back off vCloud Air in favor of Virtusream," said one source close to both companies with knowledge of their cloud plans. "There is a doubling down on VIrtustream and an elegant retreat for vCloud Air in favor of Virtustream, which has got real differentiation in enterprise mission-critical use cases."

A VMware spokesperson insisted in an email that VMware "will now continue to operate the VMware vCloud Air business, focused on helping customers seamlessly extend their data center applications to the cloud."

At the same time, the spokesperson said : "VMware and Virtustream will continue to partner closely as part of the EMC Federation. Virtustream will continue as an active member of VMware’s vCloud Air Network, with its service built on a VMware vSphere foundation."

Finally, the VMware spokesperson said it will continue to deliver cloud software and solutions to "cloud providers through VMware's vCloud Air Network."

Sources familiar with the behind the scenes drama said that VMware will maintain vCloud Air commitments to customers, but over time will "wind down" the hybrid cloud service. "Virtustream is the service provider that EMC and VMware will bet on first and foremost," said a source."Virtustream has carved out a real lucrative market at the high end of the market. No public clouds can offer a service level for Tier One applications like SAP as Virtustream can. The feeling with vCloud Air is the service is too generic, not focused enough and therefore not profitable enough. EMC and VMware can't go chasing Amazon and Google's tail lights."

Andres Rodriguez, president and CEO of cloud storage firm and EMC competitor Nasuni, said as vCloud Air's momentum has disappeared, so too will the business unit. "I think eventually, it disappears," Rodriguez told CRN. "There's no momentum behind it anymore. I think it'll be reborn as some sort of internal VMware effort. It's very hard for VMware to transition from software to services. It's hard to turn big successful companies away from core business."

"Look at Microsoft and what it's taken to say 'we're going to bet our future on Azure services.' I haven't seen VMware make that move yet. The moment VMware changes its licensing structure and starts charging for services and software as an integrated offering, then things are changing. That's when change is afoot."

The scrapping of the EMC-VMware joint venture was accompanied Monday by the resignation of two members of VMware's board of directors: former Accenture CFO Pamela Craig, a two-year board member, and former Cisco CFO Dennis Powell, an eight-year board member.

VMware also named EMC board member Donald Carty, the former CEO of American Airlines who was appointed to the EMC board in January, to the VMware board.

The uncertainty around VMware's future cloud strategy and direction comes in the wake of Dell's blockbuster $67 billion planned acquisition of storage market leader EMC, which owns 81 percent of VMware. EMC and VMware shares have been battered since the deal was announced.

VMware, which will be mirrored by a tracking stock as part of the complicated Dell-EMC deal, has seen its market capitalization fall to $24.1 billion, down $9.07 billion from a market capitalization of $33.17 billion before the deal was disclosed. VMware shares closed down three percent or $1.80 at $57.25 on news that it was pulling out of the EMC Virtustream joint venture.

Despite the $33.15 per share Dell bid, EMC shares, meanwhile, closed down 16 cents, or 1 percent, Monday at $25.75. Since the deal was announced, EMC's market capitalization has dropped by $4.09 billion.

Wall Street analysts pointed out that the elimination of the joint venture will allow VMware to sidestep $200 million to $300 million in non-GAAP charges in 2016 related to the business buildup. As part of its 8-K filing, VMware said it will update its 2015 fourth-quarter and full-year financial results in Jan. 2016.

Jamie Shepard, senior vice president for health care and strategy at Lumenate, No. 145 on the CRN Solution Provider 500, who was initially stunned by VMware's decision to reverse course on the Virtustream joint venture, applauds a Virtustream full-court press. He said Virtustream's Micro VM cloud consumption services technology prevents the massive over-provisioning that has gone on with virtualization adoption.

"We just met with Virtustream and are considering adopting the Micro VM for our hosted applications," he said. "Virtustream has a true utility computing algorithm. There is huge waste with virtualization with over-provisioning of as much as 50 percent. With Virtustream, customers will adopt the cloud quicker because they will only pay for what they use."

Shepard said he expects Virtustream to alleviate the problem of customers buying VMware licenses they don't need. "This will accelerate the sale of ELAs, which are difficult to calculate," he said. "Virtustream will allow us to build out an IT platform optimally. Customers have been overpaying for ELAs. With VIrtustream we will right-size and optimize so customers can embrace VMware ELAs on a more cost-effective basis."

Additional reporting by Kevin McLaughlin