Leveraging a firm hold on the fast-growing cloud computing market, Amazon.com Inc. is now looking to intensify its incursion into the heart of the information technology industry: corporate data centers.

Today, the retailer’s cloud unit, Amazon Web Services, announced a deal with onetime rival VMware Inc., whose widely used software allows multiple versions of the same operating software to run on the same computers. Next year, using a new service called VMware Cloud on AWS, customers of VMware will be able to move their computing jobs run on VMware software to AWS’s cloud to take advantage of more flexible and lower-cost storage and computing services.

“It’s the best of private cloud and the best of public cloud to bring [customers] the best of both worlds,” VMware Chief Executive Pat Gelsinger (above right, with AWS CEO Andy Jassy, left) said in a press conference in San Francisco. All of VMware’s infrastructure software, including vSphere, its VSAN storage software and NSX networking software, will run on AWS when it comes out of a beta test mode in mid-2017. “This is a win-win-win — a win for VMware, a win for Amazon, a win for customers,” Gelsinger said in an interview after the event.

“VMware will be our primary private cloud provider and AWS will be VMware’s primary public cloud provider,” Jassy said.

The new service could reset the competitive environment in computing, in particular dealing a blow to IBM Corp., which had signed a deal with VMware earlier this year, Google Inc.’s cloud platform and Microsoft Corp., whose No. 2-ranked Azure public cloud had been able to claim the lead in hybrid cloud computing.

But despite the rapid rise of the cloud, the reality is that most large companies expect to do computing both in their private data centers and the cloud for years to come, an arrangement known as “hybrid cloud.” For one, the so-called Big Data jobs for analyzing massive amounts of customer, sensor and other data are difficult, time-consuming and expensive to move to the cloud. Also, regulations require some data to be kept on a company’s premises.

The deal is a big reversal for both companies, which have generally presented the private and public clouds as binary choices. At a conference three years ago, Gelsinger told VMware partners that “if a workload goes to Amazon, you lose, and we have lost forever.”

For Amazon, the new service potentially could attract more large enterprise customers to use its other cloud services. Eventually, that could present a threat for VMware, since VMware Cloud on AWS becomes just another service running on Amazon’s cloud.

Although AWS has numerous enterprise customers, it began with startups and individual departments, which are still believed to be its core customer base. But the vast majority of information technology dollars are spent by the largest enterprises. “We expect this partnership to accelerate the industry-wide shift to public cloud,” Barclays Bank PLC analyst Raimo Lenschow said in a note to clients Thursday evening. But he also said it’s like to give AWS a competitive advantage versus Microsoft’s Azure and Google’s cloud.

AWS CEO Andy Jassy (left) and VMware CEO Pat Gelsinger (Photo: Seth MacMillan)

VMware’s customers accustomed to running their business applications on the company’s suite of software may move more workloads to AWS following the arrangement. For VMware’s customers, “this is a one-way trip to Amazon ‘cloudville,'” said analyst Dave Vellante, co-chief executive of SiliconANGLE Media and founder of its analyst community Wikibon. Amazon also benefits from charging fees for hosting VMware-based computing and storage jobs.

But nearer-term, the arrangement directly benefits VMware as well by providing it a connection to the leading public cloud that customers have been clamoring for. Now in technology preview mode, VMware Cloud on AWS will allow VMware customers to run any application across its vSphere suite of software running private, public and mixed “hybrid” cloud environments.

VMware will operate, manage and sell it the service. That could help it slow a recent decline in license revenues as its customer took more workloads to the cloud, and it could sell more computing management software for hybrid setups. “The ability to run vSphere on AWS would allow VMware to monetize the main growth area for workloads, which has essentially been entirely in the cloud,” Lenschow said. “This incremental revenue would be very high margin, boosting overall profitability and cash flow.”

At the same time, by joining with AWS, VMware is finally conceding that its own public cloud strategy has failed. “It’s an acknowledgment that VMware can no longer be enemies with AWS,” said Al Sadowski, research vice president for infrastructure at 451 Group. “Every workload is not going to live on premise.”

VMware had signaled its plans to accommodate customers’ desire to use hybrid public cloud-private data center setups. At VMware’s VMworld conference in late August, the company introduced Cloud Foundation, which includes services to divide workloads between data centers and public clouds.

The deal is also something of a capitulation by Amazon to the reality that most companies aren’t ready to move most of their computing entirely to the public clouds. Indeed, other providers of public cloud services, such as IBM Corp. and Microsoft Corp., are further along in embracing the hybrid cloud arrangement.

IBM, which signed a deal with VMware in February to allow IBM customers to move computing workloads from VMware to its cloud, called the AWS announcement a “clear indication that Amazon is following our lead.” The computing giant, which sells the VMware service itself in contrast to the AWS deal, now claims 1,000 of its customers using VMware have moved workloads to the cloud and it has trained 4,000 of its Global Services consultants to do the migration.

“The hybrid cloud is an area where IBM is a leader,” Don Boulia, IBM’s vice president of cloud strategy. However, the fact that AWS is now VMware’s “primary” cloud provider may make customers less certain of that lead now. “This effectively usurps the IBM partnership as VMware’s route to public cloud,” Lenschow said.

With reporting from Paul Gillin

Raghu Raghuram, executive vice president and general manager of VMware’s Software-Defined Data Center Division, talked with John Furrier, host of SiliconANGLE Media’s theCUBE, at the joint event:

Top image by Robert Hof