VMware is to offer the small-footprint version of its ESX virtualisation software free, responding to pressure from Microsoft and other companies that are threatening VMware's market lead.

The next version of ESXi, which will come in about two weeks, will be available at no cost, said VMware CEO Paul Maritz. ESXi is a basic hypervisor, which is technology that separates the OS from server hardware so multiple OSes can run virtually on one physical server.

Maritz said the move to make the already low-cost product free is part of VMware's plan to make its virtualisation and network infrastructure products "as freely available to everyone in the industry" as possible as it diversifies its products beyond merely enabling virtualisation.

A former Microsoft executive, Maritz replaced VMware co-founder and former CEO Diane Greene, who was ousted in a sudden move two weeks ago.

Bogomil Balkansky, VMware senior director of product marketing, said ESXi has all the capabilities of VMware's older ESX product, including support for advanced VMware Infrastructure features like Vmotion, which allows a workload to be moved to another physical server while it is still being used.

"Functionally the two products are equivalent; ESXi does anything and everything ESX does," Balkansky said.

The reason VMware is making ESXi free and not ESX is because ESXi has the more modern architecture and is the product VMware wants customers to use moving forward, he said. ESXi uses an agentless model for management, which is why its footprint is so much smaller (at 32MB) than that of ESX, he said.

Tom Bittman, vice president and distinguished analyst with Gartner, said the move was significant. It will allow VMware to compete more effectively with Microsoft, which is bundling its Hyper-V virtualisation software with high-end editions of Windows Server. "This takes the price argument away," Bittman said.

Most companies now are buying other VMware products along with the hypervisor, which is why the company can afford to give it away, he said. VMware should have made ESXi free from the start, he said. "That was a mistake, and they are correcting it now," he said. ESXi is currently priced at $495 (£248).

"It makes sense for us to seed the market with a free product and expose a broader set of customers to VMware, being confident that they will take the next step and upgrade to our Virtual Infrastructure product," Balkansky said.

VMware is facing some of its toughest competition yet as Microsoft and other companies seek to commoditise the core virtualisation technology on which VMware's business was built by offering it as part of the OS.

Speaking about his "alma mater" Tuesday, Maritz called Microsoft a "formidable" competitor, but "not an invincible" one.

"I know that Microsoft can afford to play a long waiting game," he said. However, in markets where another company already has a sizable lead - such as VMware does in virtualisation - it can be "really hard to catch [up] even for Microsoft," Maritz said.

VMware reported $456 million in revenue for its 2008 second quarter, which ended 30 June. It was an increase of 54 percent from the same period last year. However, consensus estimates from Thomson Financial analysts expected the company to fare slightly better, predicting $458.6 million in revenue for the quarter.

VMware fell more than 14 percent from a close of $37.97 to $32.50 in after-hours trading Tuesday.