Broadcom moves roil VMware customer base

It took Broadcom 18 months to get all of the requisite approvals needed to finalize its $61 billion purchase of VMware. But once the deal was sealed in late November, CEO Hock Tan moved swiftly, announcing layoffs of thousands of employees, selloffs of parts of the business, and shakeups to licensing terms that could prove costly to customers.

But Tan wasn’t done. In late December, Broadcom announced the abrupt termination of all of its partner agreements with VMware resellers and service providers. Broadcom is forcing existing partners to reapply for their roles, and analysts expect that only the largest resellers will make the cut. This potentially leaves smaller partners in the lurch and customers scrambling to find a new reseller or service provider.

While Broadcom’s actions are causing concern among VMware users, these decisions have not been completely unexpected based on the company’s track record with its prior acquisitions of CA and Symantec. Tan himself has been quite open about some of his intentions, going back as far as the initial announcement of the acquisition in May 2022.

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Industry analysts at Gartner, Forrester and elsewhere have been advising customers for at least a year to be thinking about an exit strategy, in the event that prices increase substantially and service levels deteriorate.

But for enterprise customers with VMware technology embedded throughout their IT infrastructure, pulling the plug is easier said than done. Forrester analyst Naveen Chhabra boldly predicts that 20% of organizations will take steps to migrate off VMware in 2024. At the same time, however, he cautions against making rash decisions.

“Don’t get driven by emotions or FUD,” says Chhabra. He recommends that organizations move slowly and methodically, use case by use case, workload by workload, to evaluate whether VMware alternatives provide a net plus to the organization.

Brad Tompkins, executive director of the VMware User Group (VMUG), says his members certainly have their concerns, but he predicts that only a small percentage will end up bolting to another vendor. He points out, “There are so many workloads running on vSphere, with the economy not great and budget cuts, if you’ve got a solution running well, I don’t see the benefit to make a change.”

Dave Raffo, an analyst at The Futurum Group, sums up the current situation this way: “There’s not a huge run for the exits yet, but people are looking.”

What has Broadcom done so far?

Tan has articulated a clear technology vision for VMware: “Broadcom’s focus moving forward is to enable enterprise customers to create and modernize their private and hybrid cloud environments. At the core, Broadcom will invest in VMware Cloud Foundation (VCF), the software stack that serves as the foundation of private and hybrid clouds.”

VCF includes the company’s flagship vSphere hypervisor, the NXS network management platform, vSAN storage virtualization, vRealize/Aria hybrid cloud management and the Tanzu platform for managing Kubernetes clusters across hybrid cloud environments.

Consistent with Tan’s strategy, business units deemed non-core are on the chopping block. Tan has announced plans to sell off the end-user computing business, which includes Horizon for client virtualization, App Volumes for application delivery, and Workspace ONE for device management and digital employee experience. The Carbon Black endpoint security product is also up for sale.

On the business side of the equation, Tan’s priority is shareholder value, the bottom line. He has publicly stated his goal of more than doubling VMware’s earnings within three years of the acquisition’s completion, driven by double-digit revenue growth every year. However, in an earnings call in early December, Tan noted that enterprise spending had slowed somewhat, and dialed back his expectation of VMware’s contribution to the bottom line from $8.5 billion within three years to $7 billion.

The two paths to boosting profits are reducing expenses and increasing revenue. Broadcom has announced layoffs of an estimated 3,000 VMware employees, and there’s no way to measure the number of employees who have voluntarily moved on to other jobs. Tan has also caused some consternation by bluntly telling VMware employees who had been working remotely, “If you live within 50 miles of an office, you get your butt in here.”

On the revenue front, Tan is converting the 60% of VMware licenses that are perpetual into a subscription model, something he said he planned to do when he announced the acquisition in 2022.

Currently, VMware customers with a perpetual license can choose not to upgrade their software and continue to run older versions. These customers typically keep their service and support contracts current. Going forward, Broadcom will no longer sell perpetual licenses, and customers won’t be able to renew service and support contracts without a new license subscription.

Enterprises typically are able to negotiate subscription pricing, and Broadcom will likely offer discounts to VMware’s largest customers, so it’s not clear how much more companies will be paying under the subscription model.

“People on perpetual licenses would have preferred to stay with perpetual licenses,” says Raffo, but it is in Broadcom’s interest “to convince people that it will not cost them substantially more to go to a subscription model.”

Tompkins says that his members expressed concerns about licensing when the deal was first announced. “Some people weren’t too happy about it.” But he points out that the entire software industry is moving to a subscription-based model, and Broadcom made its intentions clear from the start, so “it shouldn’t have been a surprise to anyone.”

Broadcom is also bundling its software offerings into two products: VMware Cloud Foundation, the enterprise-grade hybrid cloud solution, and VMware vSphere Foundation, aimed at the SMB market. Broadcom says it is reducing the subscription list price by half for VCF.

“You can’t get a la carte now,” says Chhabra. “You have to buy the bundle. The bundle price may be low, but you have no option.” This move is expected to create some friction between customers who might not want to pay for a full suite, and Broadcom’s goal of increasing revenue by encouraging customers to move up the software stack.

What are some other VMware customer concerns?

Tomkins says one of the major concerns of his members is the fate of the end-user computing division. “That was probably the biggest news that we’ve had come out since the acquisition,” he says.

VMware’s Horizon VDI product is popular with VMUG members, and there is uncertainty about who will buy it and how that new owner will treat a product that is so deeply integrated into the IT infrastructure.

Tan has tried to reassure customers about the fate of EUC and Carbon Black. “We’ll find good homes for them. There are a lot of very interested parties who are more than happy to take those assets. We will be very, very thoughtful about where we put those assets eventually, simply because many of their customers are also customers with VMware Cloud Foundation,” he says.

Chhabra says that in addition to the fears that costs will escalate under Broadcom, customers are worried about support. The layoffs aren’t a good sign, and the termination of partner agreements with resellers and service partners is even scarier.

Raffo says, “This will hurt enterprise customers if their favored channel partner cannot join the new Broadcom Advantage Partner Program. It will probably impact smaller customers more.”

Another concern, according to Chhabra is the product roadmap. Tan has said all the right things, announcing his intention to invest $2 billion into VMware, $1 billion in research and development, and another $1 billion in the partner program. But Chhabra says he wants to see specifics on where that R&D money is being directed.

Is there an offramp for VMware customers?

VMware competitors are sensing an opportunity to take advantage of this period of change and uncertainty and are making an aggressive push to convert VMware customers. However, it won’t be easy for enterprise customers to switch vendors.

Raffo points out that VMware virtualization software often comes with a server purchase, so it’s pretty much everywhere. And VMware has grown to become more than just a simple hypervisor; it’s a complete ecosystem that encompasses server virtualization, management, storage, backup, and disaster recovery. “There are a lot of moving pieces that will require work to get off of.”

Chhabra agrees. He says that a customer certainly can look at alternative hypervisors like Microsoft Hyper-V, Citrix, Red Hat, hyperconverged infrastructure options from Nutanix, or smaller players like Scale Computing and Verge.IO.

“But don’t just do a hypervisor comparison,” advises Chhabra. Investigate dependencies in areas such as data protection, security and backup. For example, does the alternative vendor provide backup and recovery timelines that are commensurate with what you have now? How about integration with third-party management tools?

He adds, “If you’re running a business-critical homegrown app on VMware, you can’t simply swap out to another hypervisor. What changes do I have to make to the application to make it compatible with the new hypervisor?”

Chhabra predicts that many organizations will slowly disengage from VMware for specific applications and use cases, but will probably always have some VMware running, creating a heterogeneous environment.

“The seeds of migration have already been sown,” says Chhabra. “If you’re serious about moving, start thinking about it now, because it takes time.”

On the bright side of Broadcom’s VMware deal

Tompkins says there’s a sense of relief among VMUG members that the deal is finally done. On the licensing front, he says that requiring customers to adopt the subscription model guarantees that they will always be on the latest version of the software, rather than falling behind. “Subscriptions encourage people to stay current on the technology and that’s a win for everybody,” he says.

And he likes the technology direction that Broadcom has laid out. “The software-defined data center is where our members want to go. Our members are telling us they want to move up the stack and do more than just vSphere.” They’re interested in hybrid cloud and multicloud and that is the direction that Broadcom is moving, he says.