Citrix buying XenSource is a bit of a surprise, but the real shocker is the price tag. A half billion dollars for a three year old company with a few hundred customers, almost no profits and a part of its intellectual property in the public domain seems like a huge premium to pay. On the other hand, VMware just set its value at $19 billion and counting through its IPO. Snatching up the number two player for a tiny fraction of that might not be such a bad deal. To make XenSource worth it, Citrix must build a data center infrastructure platform that offers significantly better manageability than what's in use today.

You don't have to look too far to understand the opportunity. IDC estimates that server management costs will grow hyper-linearly for the foreseeable future, while expenditures on server hardware itself are expected to be relatively flat over the next few years. Enterprise system management tools have done and can do almost nothing to change the growth in the cost of managing a data center infrastructure. These products are essentially bolt-on tools that can't change the fundamental difficulty of managing what are primarily static systems ­ it will always be the case that with today's operating systems, managing 100 servers will be more than ten times as hard as managing ten servers. Virtualization can change that equation.

With the addition of XenSource, Citrix is in a unique position to provide a more manageable data center infrastructure ­ if it can manage the integgration. In particular, Citrix's NetScaler application front end, when integrated with XenSource virtualization management tools, becomes a potent formula for optimizing both application and data-layer system performance. NetScalars not only optimize server connections, they fundamentally understand the loads presented to servers and could work with XenSource management to actively optimize resource utilization ­ something that today is just aa pipedream.

This is clearly VMware's vision too, but how it views the challenge, and who it sees as competition, is significantly different. Both Citrix and XenSource representatives went out of their way to give Microsoft big wet sloppy kisses during their announcement press conference. XenSource says its management tools will work both the Xen hypervisor and, when Viridian is integrated into Longhorn, with Microsoft's hypervisor, and the company maintains one third of its team in Redmond.

For its part, VMware's executives have talked openly about the death of the operating system. While rumors of its death are certainly premature, BEA put the first nail in the coffin a week ago when it announced that its LiquidVM Java virtual machine would run directly on the VMware hypervisor ­ no OS needed. That's an attractive proposition for performance hungry applications, where increasingly the static OS serves little purpose other than that of a middleman that unnecessarily sucks valuable CPU cycles.

The smart money is on Citrix to play Switzerland in this war, allowing customers to choose their hypervisor and operating system and eventually to permit no operating system at all. It's the sort of flexibility that resonates with IT architects. If Citrix can pull it off, that $500M price tag will seem like a bargain.