Since the news of Broadcom’s agreement to acquire VMware for approximately $61 billion in cash and stock broke, I have opined with several articles. As the situation has evolved, my early negative impression of Broadcom acquiring VMware has shifted to thinking it is better to give the deal a chance and focus on what will make it successful.
The deal enters a new regulatory phase
In December 2022, the European Commission (EC) opened an in-depth investigation into the Broadcom/VMware deal. The inquiry will address the concern that Broadcom could restrict competition in the network interface card (NIC), fibre channel host bus adapter (FC HBA), and storage adapter markets. Specifically, the EC is evaluating whether Broadcom could degrade interoperability or worse by preventing competitor hardware from using VMware’s server virtualization software. If Broadcom embarked on this path, the EC argues, it would lead to higher prices, lower quality, and less innovation.
The Commission has 90 working days, until 11 May 2023, to make a decision. In this article, I will outline why the EC’s concerns are unfounded.
It would be business suicide
VMware has a huge installed base of around 400,000 customers, with its on-premises infrastructure software (ESX/ESXi) found in most enterprise data centers. Not providing the customer base with a seamless migration path for new software releases on the existing hardware installed base would accelerate the adoption of alternate hypervisor offerings.
As customers are increasingly moving to containers, open-source software, and public cloud technologies, VMware is adapting to cloud computing and containerization, both of which have accelerated VMware’s transition to a software-as-a-service (SaaS) company.
VMware’s annual revenue in fiscal 2022 was $12.85 billion, from which $6.5 billion came from the service businesses. A further $3.2 billion came from subscriptions and SaaS, with the balance of $3.15 billion from new license revenue. As is the case for any enterprise software company, a significant portion of VMware revenues come from licenses and support on the existing installed base versus licenses and support on new deployments.
The effect of the SaaS application being modified in some way to degrade interoperability or prevent a competitor from using VMware’s server virtualization software would be a catastrophe for future revenues.
Customers would go elsewhere
There are many players in the hypervisor market. In addition to the competitive threat from multiple hypervisors (Hyper-V, Xen, KVM), applications are rapidly transitioning to a container architecture. Workload migration between hypervisor vendors requires no changes, making migration increasingly easy.
In addition, VMware software is dependent on getting support from industry-leaders such as Intel, AMD and NVIDIA, for the VMware product to be adopted today and tomorrow. Thus, potential moves by Broadcom to degrade interoperability or limit support would immediately benefit its hypervisor competitors.
Cloud providers, notably Amazon Web Services (AWS), Microsoft, and Google, may also benefit as customers accelerate cloud migration plans or opt for a cloud-native approach rather than a VMware-based solution.
The multi-cloud opportunity is a growth driver
I know the future is hybrid and multi-cloud, but such environments are inefficient today, as enterprise IT teams needs tools and services to simplify their architecture and make it less costly.
Most enterprises use multiple public clouds, such as AWS, Azure, Google, Oracle, and/or IBM Cloud. Each cloud has a different way of handling security, networking, and data, leading to efficiencies requiring a unique DevOpsInfoSec team and processes for each cloud.
VMware’s goal is to simplify complex cloud environments, starting with the server and storage, the management layer, DevOps, and the development layer. VMware Tanzu is a set of tools and products that enable developers to release code quickly. It eliminates manual steps, automates containerized workloads based on Kubernetes, and proactively manages applications in production.
VMware has built the VMware Cloud platform to allow developers to build and deploy applications to any cloud. Using VMware Cloud, applications deployed to VMware Cloud Foundation will run on AWS, Google Cloud, Microsoft Azure, IBM, and Oracle Cloud without modification.
VMware is positioned to potentially be one of the big winners of the hybrid/multi-cloud era, providing consistent development, operations (with observability), and security across all clouds. The bigger winners would be the end-users, because it would give them the tools to more effectively and efficiently manage different cloud environments.
Broadcom’s track-record of execution and investing in core technologies (not research) could enable VMware to realize this vision — deliver a choice to the end-users of either building private clouds or buying from public clouds. I believe this puts the end-users back in the driver seat.
I cannot imagine a scenario, including messing with product interoperability, where Broadcom would interfere with VMware’s multi-cloud stack, which represents an enormous business opportunity and is the growth driver for VMware now and for the foreseeable future.
If you have been in the technology business long enough, history has a habit of repeating, and you probably have a strong feeling of déjà vu about this deal, including the interoperability concerns.
When Michael Dell bought VMware Inc. in 2015 as part of the EMC acquisition, VMware was in a much stronger position than it is today. The acquisition created great angst amongst Dell’s server competition, with concerns that Dell would take VMware’s virtualization software for itself. The reality was that it was in Dell’s interest not to mess with virtualization and server interoperability, and let VMware operate independently of Dell until it became a separate company again.
Fast forward to 2019 with the acquisition of Red Hat by IBM. The same companies voiced the same interoperability concerns. The result? Nothing materialized, and Red Hat continued with business as usual.
The moral of this story is that acquired software companies like VMware and Red Hat need to address the total addressable market to be profitable, which inevitably means working with the competition of the parent company. It’s a lesson Broadcom would be smart to heed, and one that I believe its CEO Hock Tan understands well. From our conversations, Tan has made clear that Broadcom intends to grow, compete, and innovate for years to come.