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Unless you’re an information technology manager or a Wall Street banker still drooling over VWware’s $32 billion market cap, virtualization is not sexy. But it soon might be, with VMware’s agreement to buy desktop virtualization startup Thinstall. Bringing virtual software to the desktop for employees and consumers effectively makes the portable desktop a reality.

Yes, I know web applications and software as a service can make applications portable, but I’m talking about replicating your enterprise applications on a thumb drive, plugging that into a home or remote computer, working on something, saving it, and then bringing it back to the office. Thinstall enables that entire process; it also offers as a version of what the tech world used to call thin-client computing. Virtualization has more cachet, though.

For VMware, this deal pushes them deeper into the software side of virtualization, which is good considering the company’s dominant market share on the sever side. To feed that huge market cap, VMware needs to grow, so buying Thinstall is a logical step. The move also follows on the heels of VMware’s purchase of small independent software integrator Propero. The company will likely make additional buys to stay ahead of its competition.

As for the competition, it’s not standing still. Last summer Citrix bought server virtualization company XenSource for $500 million; Microsoft purchased desktop virtualization provider Softricity the year before. Today’s move by VMware may put Thinstall competitors such as Endeavors Technologies Kidaro, and InstallFree in play.

Years ago, Stephen Dukker helped to disrupt the personal computing industry when the company he founded, eMachines, started selling PCs for $400 each, effectively broadening the number of consumers who were able to buy computers. And now he’s trying to do it again, as CEO of Redwood City, Calif.-based virtualization startup NComputing, which just raised $28 million in a second round of funding.

NComputing makes terminals bundled with a keyboard, mouse and monitor that can be hooked up to a PC (given the processing power available in today’s computers compared with what’s needed for most applications, multiple terminal kits can be connected to a single PC.) After selling some 600,000 kits primarily to educational users over the past year-and-a-half, NComputing will take the $28 million it just raised (at a more than $100 million valuation) and use to target the enterprise market.

I spoke with Dukker about the importance of opening up new markets for PCs, and how that can be done using software. We also talked about NComputing’s push into the enterprise market, even as it continues to find success in education and the developing world. Currently the company sells 80 percent of its terminals to educational buyers, with 50 percent of its sales occurring in the U.S.

Q: Why would someone want to get into the PC industry today?

A: At eMachines we proved there is no low-cost PC that allows their suppliers to be profitable. Since the industry has not been able to bring prices down further, we have not been able to open up new markets. So all a PC maker can do to gain market share is to sell at low margins and steal share from other people.

Q: So why did you come back to the PC world?

A: After eMachines, I thought I was through with PCs, and then I got a call from my No. 2 guy at eMachines who was in Germany working with these guys who said they could lower the cost of PC ownership with software. I told him if you can do this, you can potentially change the world. The cost of the PC basically goes away. The chip costs $2 to produce, but the software is hard to do. It’s exactly what companies like VMware, Citrix and Microsoft are doing with desktop virtualization.

Q: What made the software so compelling?

A: With the PC what we have is a classic situation of the exhaustion of an architecture. PCs are becoming supercomputers and the applications are not keeping up. Unless you are doing some super science or are a hard-core gamer, you don’t need the processing power. With our software and hardware you can run a couple of terminals on one computer for about $70 per kit. It costs us about $11 to make the kit. This allows us to charge the customer less and make more at the same time, which is the hallmark of a disruptive technology.

Q: Why go after emerging markets first?

A: We gain credibility. By engaging enterprise customers later we will have more than 1 million people using our machines around the world. I want to further emphasize that this technology was not designed for emerging markets and education. It was originally designed to be a Citrix killer — the most efficient and cost-effective server-based computing solution for the enterprise. The reason we’re seeing the huge response in the education and emerging market is because their needs are immediate, whereas we know the enterprise markets are fairly slow.

Q: Where will you take this next?

A: We accepted the money to pick up the pace on the enterprise side without losing focus on our current markets. We are in trials in many large enterprise environments, and will make a meaningful impact on the Citrix and VMwares of the world in the back half of this year. We are also going to introduce a new product for broadband providers where you could have our chip inside a set-top box. It will be a desktop that’s being served to you for a couple bucks a month over your television by a broadband provider.

Right before the Christmas holidays I got a chance to catch up with Dr. Mendel Rosenblum, VMWare’s chief scientist and one of the company’s four five co-founders. Rosenblum is also an associate professor of computer science at Stanford University, where he leads a group focused on operating systems research. It was at Stanford where Rosenblum and three of his graduate students — Scott Devine, Edouard Bugnion and Dr. Edward Wang — came up with the idea that led to VMWare (VMW). Diane Greene joined them as CEO and the fifth co-founder and the company went public in August, garnering a multibillion-dollar valuation that triggered a virtualization frenzy.

Given that VMWare was in a quiet period prior to the release of its quarterly results, my conversation with Rosenblum was quite general. But he did share with me, among other things, the story of how VMWare got started and his outlook for virtualization in 2008. Here are excerpts from the interview:

How did VMWare get started?

I was a professor at Stanford University and we were building a supercomputer called the Flash Machine. I didn’t want to crunch numbers on this machine, but wanted to use virtualization to see if we could run commodity OSes on [it].
We could, and we wrote a paper about it, and that generated a lot of interest, including from Microsoft, who emailed us and wanted us to come and present to them in Redmond. My grad students who worked with me on the project thought we could commercialize the technology, and in 1998 we launched VMWare.

What was the plan when you launched it?

Clearly, the technology was going to be hard to commercialize, and we decided to focus on doing virtualization on the desktop. We worked on the technology and my wife took care of the business side of things.

It seemed to have been a long time in the making.

It took a lot longer than I thought it would take. We released it first on the Linux platform, because we felt the Linux community would adopt it much faster. That proved to be a good move.

Funny now that you have proved it, there is competition coming out of the woodwork. Oracle and Microsoft, for example.

VMWare clearly is going to have competition. Sure it was nice when we were all alone, but we are very different from these other companies. Oracle and Microsoft, for example, are focusing on single machines for now. That’s a nice thing to do. We used to do that. It is good for server consolidation and it is easier and simpler.

What we are doing is basically coming up with a new way to run the data center. So from that perspective, we will continue to have something better than others.

Let’s talk about the data center for a minute. Do you think the whole architecture of the data center needs rethinking?

We went down a rat hole on how we built the data centers. I am not surprised with all the problems we are having with data centers. In my opinion, the architecture has problems because it was built with inferior solutions. What you had was people placing services on servers in a way that led to lightly loaded machines that were idle most of the time. The whole thing was built for peak performance (and not maximum utilization.) Well, idle machines use as much energy as fully utilized machines. The way out of this is to put more on the machines, and get them to be more efficient and take on the work load that will, to some extent, lower the power consumption.

I wrote about pizza boxes becoming a problem, mostly due to low utilization and higher power consumption. It kind of ties in with your thesis.

You have to see them not as boxes but as resources. People are now beginning to utilize virtualization and federate these pizza-box servers. I think if you start to view them as one unit, you can get more utilization out of them. I think in coming months you are going to see a big push to make all servers (and other hardware) inside a data center look more like a single unit. Ironically, if you look at the future — low-end pizza box servers with multicore CPUs running our software — you will start to see the big machine we were building where we got started.

What is your forecast for 2008 from a virtualization standpoint?

We are in a transition period. I think a lot of people dipped their toes in virtualization and got started with server consolidation. They bought into it the “money-saving” argument. In 2008, I expect people to fully embrace virtualization and extend it to other parts of their businesses, even bringing it in-house and using it for optimizing their desktop infrastructure. More importantly, you will start to see the long-term impact of virtualization in the next 12 months.