VMware is now targeting a market that Microsoft has dominated for decades

The battle between one of the world's most powerful software makers, Microsoft, and the big, huge thorn in its side, VMware, has taken another turn this week.

VMware on Monday launched a new cloud service that helps companies manage passwords and identities: VMware Identity Manager.

Companies that buy Identity Manager can order it as a cloud service, or install it in their own data centers, and it works particularly well with VMware's software that helps companies track and protect smartphones and tablets (known as mobile device management).

Just over a year ago, VMware bought its way into the mobile device management (MDM) market when its newly-hired executive Sanjay Poonen (poached from SAP), led VMware's biggest-ever acquisition, the $1.5 billion purchase of mobile security company AirWatch. This is a continuation of that push.

The new identity service goes head-to-head with Microsoft's Active Directory, which has been the gold-standard for managing employee passwords for decades. Microsoft says that over 95% of businesses around the world use AD for password/identity management.

Microsoft's cloud version of Active Directory is also one of the most popular cloud service the company offers. For months, Microsoft CEO Satya Nadella has been showcasing Azure Active Directory as the poster child of Microsoft's success in the cloud.

He says 5 million companies today use the service, providing password control for over 450 million employees.

"That means 5 million commercial organizations that have a relationship with Microsoft in the cloud and not on premise or with our licenses," Nadella told Fortune.

More importantly, Azure Active Directory is providing passwords for Microsoft's other cloud services like Office 365, Dynamics (Microsoft's answer to Salesforce) and Enterprise Mobility Suite (Microsoft's answer to AirWatch).

These services are more profitable than the "race to zero" competition Microsoft is in with Amazon and Google over commodity cloud storage and compute services.

And, as we previously reported, people close to Microsoft have been telling us that there's a frantic push inside the company to get Microsoft's enterprise customers to not just "buy" Azure (allow it to be added to their enterprise contracts, paid for by discounts on other products), but to actually use what they've bought (i.e. become real customers of the service, not just the equivalent of "free-trial" customers).

So, naturally, Microsoft isn't particularly pleased that VMware is trying to muscle into its Active Directory turf. Microsoft PR is circulating a statement on why Microsoft still rules this market, telling us:

You may be following the identity news VMware has made. It is great to see VMware further validate what customers having been telling us. ... Microsoft not only provides identity and access management tools, we are running them on a true internet scale cloud directory, with Azure AD. On an average day we do 1-2 billion authentications.

And, by the way, VMware isn't the only competition Microsoft has. Startup Okta is a very popular choice for this kind of identity management, too.

It helps companies manage the passwords to hundreds of other cloud apps, too. It has over 2,000 customers it says, is growing fast and the No. 1 app they use Okta for is Office 365, CEO Todd McKinnon tells us. (No. 2 is Salesforce.)

VMware's new identity product was part of a barrage of new announcements VMware made for its AirWatch unit. Others included:

• Better support for iOS devices, letting companies easily pre-load corporate apps onto iPhones and iPads.
• Support for the AT&T Work Platform, a program AT&T announced in January that lets an enterprise add an employee-owned device to the corporate voice and data plans, so an employer can pay for work-related use, and leave the employee to pay for personal use.
• More app makers joining a program called App Configuration for Enterprise (ACE), a standard way to add security to work-related mobile apps.