Storage Is A Good Fit For Subscription; Servers, Not So Much

I’ve researched the subscription-based hardware market for many years. I have the firm belief that:

  1. The storage infrastructure most naturally fits the subscription model.
  2. The server/VM ecosystem could fit but doesn’t as much.

The major difference between these is that the storage vendors own the respective storage stack — hardware and software. It’s relatively easy for storage vendors to take on that cost and sell it via subscription. I am not underestimating the capital involved in that process.

In contrast, the server vendors such as Dell, HPE, and Lenovo own just the hardware. The important ingredient — server virtualization software — comes from infrastructure software vendors like Citrix, Microsoft, Red Hat, and VMware. VMware, undeniably, holds the lion’s share in this virtualization market. Unless the vendor that front-ends deals is willing and the entire stack is available via subscription, the server subscription market will be stagnant.

The Subscription Server Market Briefly Saw New Possibilities

At the end of calendar year 2023, this market witnessed a growth catalyst. Broadcom/VMware announced that its software will be available as subscription-only. It raised hopes and possibilities for server vendors to build a subscription bundle. They would develop a back-to-back agreement with VMware and develop offerings based on it. This news could fuel growth in the subscription-based server market.

But that hope fell flat on its face as Broadcom announced another change to its resellers program. Server vendors are no longer the distributors for VMware infrastructure software. As a result, Dell terminated its VMware reseller agreement. This means all server vendors that were once a major distributor/reseller of VMware software will now have to go through designated VMware distributors. The details of the new program are not public yet.

Server vendors face more challenges and risks than they did in the past. What will be the result?

  1. Server vendors will have to front-end deals, underwrite (or buy insurance for) the subscription business, and assume risks. Would Broadcom be interested in taking on recurring revenue risks in partnership with server vendors? I believe that it’s not likely given Broadcom’s modus operandi.
  2. Server revenue will decline on account of lost VMware licenses — a significant drag on top-line and bottom-line revenue.

What Does The Future Look Like?

Server vendors have been facing challenges, as businesses have been migrating/moving to the public cloud where hardware is rarely provided by these same vendors. Server vendors have two possible paths:

  1. Join the larger distributors as resellers and settle with a lot lower margins.
  2. Explore alternatives to VMware hypervisor (and other infrastructure software) to stay in the game.

What Do You Think?

I am looking forward to publishing a few research reports on this market situation very soon. If you are a server vendor exploring future possibilities and wanting to discuss, submit an inquiry request. If you are a VMware customer and need to discuss the strategic options, please reach out so we can talk.