As Broadcom’s $61 billion acquisition of VMWare moves through due diligence, the enterprise IT industry is bracing for what will happen next. Broadcom CEO Hock Tan stated in a blog post that “multi-cloud, cloud-native apps and pricing” were top of mind for customers he talked since the deal was announced in May. Meanwhile, industry analysts continue talking about those topics and what this deal means for the future of the IT industry as they look at Broadcom’s past acquisitions for answers.
“VMware customers have seen companies acquired by Broadcom emerge with lower profiles, slower innovation and higher prices - a combination that makes them nervous about the virtualization giant’s future,” wrote The Register after the deal was announced.
In an interview with The Forecast, Steve McDowell, senior analyst for data and storage at Moor Insights & Strategy, explained why the move has created such uncertainty across the IT industry. He said the deal raised concerns that the acquisition could lead to higher prices, fewer customers, discontinued products, less innovation and “brain drain” of VMware talent.
“This is going to be huge for Broadcom stockholders,” he said. “This is also going to be a huge opportunity for VMware competitors, simply because they don’t have that same stigma and uncertainty facing them.”
That stigma comes from growing fear and uncertainty among VMware customers.
“They don’t know what Broadcom is going to do with the asset,” said McDowell.
Reactions to Broadcom’s Acquisition of VMware
Broadcom stated that the VMware product portfolio is an asset that will deliver value to both shareholders and Broadcom’s existing customers. The company said it even plans to rename its existing software business “VMware.” Meanwhile, industry analysts and media explore scenarios for how the acquisition might play out, including growing interest in alternatives to VMware.
Results of a S&P Global Market Intelligence survey showed 40% of VMware customers had negative sentiments about the acquisition. “When the analyst crunched the numbers for current customers of both VMware and Broadcom, 56% expressed negative sentiments,” wrote The Register, reporting on the survey. More than a quarter of respondents rated the deal as “extremely negative.” One reason for the negative response was the potential impact on software licensing terms and conditions.
“IT guys just want simplicity,” said McDowell.
How Were Other Broadcom Businesses Affected?
To understand the trepidation surrounding the VMware acquisition, McDowell said it’s important to know a bit about Broadcom and its history. He noted that the company has made 17 acquisitions since 2010, including data storage networking company Brocade in 2017.
“Broadcom’s business model is to take a set of technologies that have largely matured and bring them into the fold and try to extract maximum value,” he said.
“Typically, when you bring something in and treat it as a commodity, you’ll do incremental improvements to the product and keep it alive and keep it relevant. But we don't see a lot of long-term innovation in these situations.”
Broadcom has positioned itself as a one-stop shop for data center infrastructure, according to McDowell. Much of that infrastructure has historically come in the form of commodity hardware like switches. McDowell sees the VMware deal as proof that the center of gravity in data center infrastructure is shifting more toward software.
“I look at Broadcom as a holding company for a lot of different technology brands,” McDowell said.
“Some of those technology brands are really good, but they’ve reached a phase in their lifecycle where there’s not a left to do except make sure they’re still good enough to sell during the next quarter.”
How the Broadcom Acquisition Affects VMware’s Current Customers
McDowell sees two potential big beneficiaries of Broadcom’s VMware acquisition: Broadcom shareholders and VMware competitors.
“Every public company has to grow,” said McDowell. “If you look at the list of potential acquisitions in the space where Broadcom operates, it’s pretty small. So if I’m Broadcom,and I’m looking for market expansion, VMware is great. I’m buying a customer base. I’m buying steady revenue.”
He said VMware doesn’t manage its margin very well and has a lot of overhead.
“Broadcom is saying, ‘We can trim the fat,’” McDowell said. “If they can hit the targets they’ve publicly talked about, it’s going to be really good for their shareholders.
“The other big winner here is a company like Nutanix.”
Nutanix and VMware are two of the most recognized names in hyperconverged infrastructure (HCI) and virtualization. Although thousands of enterprise IT teams around the world use both companies’ products, Nutanix and VMware are rivals around HCI, virtualization, IT automation, hybrid cloud management, software-defined file storage and network-based microsegmentation and other data center innovation. Their software helps companies modernize their IT operations and evolve to hybrid multicloud, which has become the most perfected operating model in recent years, according to the Enterprise Cloud Index.
Companies around the world use both VMware and Nutanix. Nutanix president and CEO Rajiv Ramaswami said his company remains committed to making this cross connection work, even as customers express uncertainty about the acquisition.
“Many customers, partners and prospective customers have reached out to us recently because they are running mission-critical applications and they’re concerned about the impact to their businesses in the future and what it (the Broadcom-VMware acquisition) means to them,” said Ramaswami.
“They are making contingency plans and exploring alternatives,” he said. “There is definitely a higher level of engagement from VMware customers as a result of what’s going on out there, and they’re more open to discussions with us.”
That led Nutanix to launch a VMwhere? campaign aimed IT professionals curious about viable options.
“For companies looking to mitigate their risks downstream, this message – ‘We’re here to help’ – is even more critical for them now,” Ramaswami said.
Will Broadcom’s Acquisition Affect VMware’s Existing Product?
Customers and channel partners complained after Broadcom acquired CA Technologies and Symantec, according to The Register.
“Following these purchases, CA and Symantec customers saw massive price hikes, worsening support, and stalled development,” wrote Tracy Woo, Senior Analyst at Forrester, in a report covered by IT industry publications. “Symantec redirected its focus to its biggest resellers and customers. The company largely abandoned its customer base of 100,000 to prioritize its top 2,000.”
That’s a business strategy Broadcom stated in a 2021 investor meeting, which still reverberates through the company's latest acquisition deal. McDowell said that focusing on top strategic customers could mean many existing VMware customers won’t get the kind of support they did in the past.
“Broadcom has very publicly talked about how they can get a higher return out of existing assets and that’s the kind of language that scares people,” McDowell said.
“Part of what Broadcom will undoubtedly do is synergize across the organization,” he said. “There’s also fear that there may be brain drain.”
In an October blog post, Broadcom explained its strategy for VMware and addressed pricing and other customer concerns. But a big question for McDowell remains: Will Broadcom prioritize hybrid multicloud environments or will they focus more resources on the core commodity piece of the business?
“If I’m considering VMware right now for something new, I think it’s a pause,” McDowell said. “I’m not going to make a decision until I see how things shake out. It opens the door to competitive technologies, and the list of players in that space is very, very tiny.”
Understanding the Impact of Broadcom’s VMware Acquisition
If the deal finalizes in 2023, McDowell doesn’t see much changing for VMware customers right away, but disruption could be around the corner.
“I don’t think there’s any impact in the near term to VMware customers and the products that are shipping right now,” he said.
The problem isn’t that Broadcom has specific plans to shelve specific products, said McDowell, but rather that customers simply don’t know what will happen.
“To be fair to Broadcom and VMware, we don’t know what they’re going to do,” McDowell said.
To explore possible outcomes, he harkened back to two big-time acquisitions that played out very differently from each other: AOL-Time Warner and Dell Technologies’ purchase of EMC. In the decades since AOL was acquired by Time Warner, McDowell pointed out that the AOL brand has largely disappeared. On the other hand, Dell successfully incorporated EMC’s products into its own portfolio when it bought the storage company in 2016.
After Broadcom bought CA and Symantec, the cost base for the two software businesses was cut by 60% to 70%, according to Bloomberg. McDowell, like many others across the IT industry, wonders how significant reductions would impact how VMware invests in innovation for customers.
“If I was buying Brocade parts five or 10 years ago, I’m perfectly happy today, but that’s not part of the industry that looks for big leaps in innovation.
Will Broadcom Lay Off VMware Staff?
“When Broadcom says, ‘We’re going to introduce efficiencies into VMware,’ we don’t know what that means. We don’t know if products or teams are going to get cut, or how they’re going to merge resources.
“We just really have no idea.”
Editor's note: In this related Nutanix blog, Lee Caswell, senior vice president of Product and Solutions Marketing at Nutanix, explains Three Strategies to Help Manage Risk Arising from Broadcom’s VMware Acquisition. Also, learn how the Nutanix Cloud Platform helps unify hybrid multicloud IT infrastructure.
Calvin Hennick is a contributing writer. His work appears in BizTech, Engineering Inc., The Boston Globe Magazine and elsewhere. He is also the author of Once More to the Rodeo: A Memoir. Follow him on Twitter @CalvinHennick.
Ken Kaplan, editor-in-chief of The Forecast, and Jason Lopez, executive producer of Tech Barometer, contributed to this story.
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