According to recent reports, PayPal is abandoning VMware for OpenStack, an open-source cloud platform that has picked up a lot of steam in just a couple of years.  Senior Analyst  Stu Miniman appeared on the this morning’s NewsDesk show to take an in-depth look at the story and what is means for VMware in the long run (full video below).

He kicks things off by providing some extra background on the news: eBay, which acquired PayPal in 2002, adopted OpenStack last year. The e-commerce firm  is now following suit, but Miniman says that it’s highly unlikely the company will simply replace tens of thousands of VMware licenses with OpenStack. He points out that the person who leaked the information is apparently involved in the project, which suggests that the tip-off may not be particularly reliable.

Miniman views the creation and the industry’s continuous support of OpenStack as a response to Amazon, which is biting away at the market share of vendors such as VMware. The latter is caught in the cross fire because it has to compete with both Amazon and OpenStack.

“VMware is stuck in the middle of a trend here. For the longest time it was VMware competing against non-virtualized environments. As we’ve now reached [a point where] a majority of applications are virtualized,” Miniman says.  It’s no longer a question of if an organization virtualizes, but “how it fits in with the rest of the ecosystem.”

Realizing this, VMware decided to go with the lesser of two evils. The company is actively  contributing to OpenStack as a part of a broader attempt to enter the hyperscale market on the back of the software-led data infrastructure (SLI) movement.

VMware shelled out $1.2 billion for software-defined networking startup Nicira, and parent company EMC is making progress with storage virtualization. Miniman says that SLI is the right approach, but stresses that both of these trends are still in their infancy. He emphasizes that in order to succeed, VMware must improve its relations with both developers and the channel.

See Miniman’s entire segment below: