EMC Corp. can't celebrate too long after spinning off a 10 percent stake of its VMware Inc. software unit in what became the biggest technology stock offering since Google Inc. went public three years ago.

The IPO has enriched EMC and opened new opportunities for the largest vendor of corporate data storage and services. But emerging challenges also threaten to dull some of the luster of its 2004 acquisition of the fast-growing "virtualization" software maker for $625 million _ an investment that yielded an enormous payoff Tuesday.

What had been one in a string of small-company acquisitions by 28-year-old EMC to diversify beyond its traditional storage hardware niche now has a market value of around $20 billion. That's just more than half the $38 billion market capitalization of Hopkinton, Mass.-based EMC, which owns 86 percent of VMware and controls 98 percent of the voting stock.

VMware has captured more than 80 percent of the market for virtualization, which helps data centers get more processing capacity from server computers. VMware's products allow a single machine to run multiple programs and operating systems.

"In the past six years, VMware hasn't really had any competition," Gartner Inc. analyst Tom Bittman said.

But now EMC and Palo Alto, Calif.-based VMware must fend off moves by the likes of Microsoft Corp., which is expected to enter the fray next year with a virtualization product code-named "Viridian." A far-smaller virtualization player, Palo Alto-based XenSource Inc., got a potential lift this week when it was purchased by Citrix Systems Inc. for $500 million. Another small virtualization player is Lowell, Mass.-based Virtual Iron Software Inc.

Bittman said VMware has been able to set its software prices based on the expected savings that virtualization could yield customers who would otherwise have to buy more hardware to accomplish their computing tasks. But with open-source versions of virtualization products emerging _ and even VMWare offering certain products for free _ prices will come down.

"Now, if you have competition that says, `We can do the same for a lot less,' that changes the landscape," Bittman said.

Since EMC bought VMware to further its move beyond storage hardware _ an area that has seen profit margins dwindle _ VMware has been EMC's star, consistently posting quarterly revenue gains of around 90 percent. It's on pace to break $1 billion in revenue this year _ while EMC as a whole projects nearly $13 billion.

Under EMC's ownership, VMware has expanded from about 300 employees to 3,000, and EMC even built new Silicon Valley headquarters for the unit _ for which VMware now owes EMC $127 million under terms of the February agreement that led to the stock offering.

VMware's growth prospects, now expanded by the nearly $1 billion raised in its IPO, could increase EMC's opportunities to pitch more of its storage hardware and services alongside VMware's software as data centers upgrade.

But EMC must still convince information technology managers that its products would be better fits than those from such storage rivals as IBM Corp., Hewlett-Packard Co. and Network Appliance Inc.

"From EMC's standpoint, there is a lot of opportunity to leverage more and more of the types of technology that VMware is starting," said Richard Villars, a storage systems analyst with the research firm IDC.

EMC's stock also is expected to be closely tied to the fortunes of VMware's newly issued shares as long as it EMC holds onto its majority stake. (Silicon Valley heavyweights Intel Corp. and Cisco Systems Inc. own smaller pieces purchased before the IPO.) EMC's stock has gained about 38 percent this year, largely in anticipation of the IPO, after three years of little change.

"EMC's success is very dependent on the success of VMware, so if it struggles, it will affect EMC significantly," Bittman said.

Bittman expects VMware will respond to competitive challenges by buying technologies to expand its product offerings. If that happens, Bittman said he will be curious to see whether EMC's unusual ownership structure of VMWare helps or leaves the virtualization vendor with "one hand tied behind their back."

EMC's top executive, Joe Tucci, chairs VMware's board, and EMC will continue to count VMware's revenue and profits toward its own earnings. Meanwhile, VMware's employees can acquire stock options in their own EMC-controlled company _ an incentive to help VMware recruit top software designers and keep its existing ones. Tucci and other EMC executives were not granted shares from VMware's IPO, and there are no plans for them to acquire any, EMC spokesman Michael Gallant said.

Some analysts think the two partners' interests might eventually diverge, and EMC might consider selling some of its VMware investment.

"For EMC, the question is whether VMware is an investment holding, or a part of its business," Bittman said.

EMC's chief financial officer, David Goulden, foresees a long relationship. As long as the IPO continues to meet its original rationales, he said, "there would be no reason to change our capital structure."