Late Sunday evening, Bloomberg reported rumors of advanced Broadcom talks to acquire VMware, which has since been confirmed this morning. In light of Broadcom’s investment activities in the past few years, this news is unsurprising. It made a string of massively expensive enterprise software company acquisitions: Brocade Communications Systems in 2016 ($5.9 billion), CA Technologies in 2018 ($19 billion), and Symantec in 2019 ($10.7 billion). VMware, with a current market cap of $50.3 billion, stands to be its most expensive acquisition yet. Despite stock share increases, this isn’t welcome news for VMware customers. For acquired companies, a Broadcom acquisition sparks fear of price hikes, diminished support, and stunted innovation. At a time when VMware customers need to reestablish confidence in the company’s strategy and innovation plans after beloved ex-CEO Pat Gelsinger’s departure, this would be a notable departure from that course.
After all, VMware customers should be concerned especially if Broadcom follows the same playbook it used for its CA and Symantec acquisitions. Following these purchases, CA and Symantec customers saw massive price hikes, worsening support, and stalled development. 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. With VMware, the big question is whether Broadcom can leverage a massive enterprise software portfolio and customer base to build a competent modern solution that extends from mainframe to edge. Or does it continue with the same trend of squeezing clients for licensing dollars at a time of rising global inflation?
Broadcom has recently been expanding into areas outside of its traditional semiconductor business to include infrastructure and enterprise software. The semiconductor market has been hard hit by the pandemic, with materials shortages and supply issues combined with flattening growth in performance and incremental improvements in innovation due to constraints in device physics. With an eye to the horizon, Broadcom is looking to remain relevant in the tech world by further diversifying its portfolio. VMware is a main player in enterprise IT software, serving as the market standard for server virtualization software. The company especially wins with its management products (vRealize management suite and CloudHealth). These products have seen tremendous growth year over year and continue to far exceed their competition. Its end user computing offerings are another notable strength with its Horizon and Workspace ONE solutions.
What Are VMware’s Prospects?
Although VMware is still the de facto enterprise virtualization software, it’s been slowly losing relevance to containers, open source software, and public cloud technologies. Still, erosion of ESX/ESXi’s stronghold on the enterprise will likely have a long tail. Its on-premises infrastructure software is firmly entrenched in most enterprise data centers.
VMware has been proactively working on a multiyear plan across many new areas to recover this revenue in newer technology markets. Its success in each endeavor has varied, however. The company’s vCloud Air product was short-lived. It was quickly replaced with a partner play through its VMware Cloud on Amazon Web Services (AWS) and other similar partnered offerings with the major hyperscalers. vSAN has done well, only facing significant competition from Nutanix. NSX saw market adoption but has yet to establish itself as the de facto standard or gain recognition as a definitive leader in its market. Red Hat’s Ansible Automation Platform could evolve to challenge VMware’s stronghold in enterprise IT infrastructure automation on-premises — each has its own strengths today. For VMware, its distinct differentiation and leadership remain in only a few avenues: its cloud management products, vRealize solutions and CloudHealth, and its end user computing offerings, Horizon and Workspace ONE.
As it stands, VMware’s differentiation of providing an ecosystem of technologies in one place is becoming less marketable with stronger competitors and the entrance of open source solutions. If VMware stays the course alone, it needs to better articulate how its existing vSphere/vCenter customers can transition to cloud-native technologies using the Tanzu portfolio as part of a broader IT modernization strategy. For example, the Tanzu Application Platform (TAP) product aims at improving developer experience and productivity in a Kubernetes environment — an important offering but one that misses on supporting the entire modernization narrative. For its end user computing roadmap, VMware needs to expand beyond its virtual desktop infrastructure (VDI) and endpoint management space to either: a) transform itself into a full-blown experience management company or b) double down on security investments and position itself as a security-first vendor for anywhere work, as it is starting to do with its Anywhere Workspace solution.
What Are The Competitive Implications?
If VMware customers are spooked by the Broadcom acquisition, Red Hat and hyperscalers stand to benefit. VMware customers looking to fully move off VMware could migrate to Red Hat’s open source kernel-based Virtual Machine as an alternative hypervisor. And although Pivotal (now VMware TAP) took an early lead as a multicloud container platform standard for enterprises, Red Hat’s OpenShift cloud platform has surpassed TAP in total market share and capabilities as VMware faltered in satisfying its customers.
Specifically, VMware clients struggle with navigating the company’s multiple solutions — some products support legacy VMware standards, while others focus on cloud-native standards. Existing VMware clients have been in a multiyear wait as the company gets more organized with its approach. An acquisition by Broadcom will only further diminish customer confidence and push interest toward other big multicloud container brands such as Red Hat’s OpenShift, Google’s Anthos, or SUSE Rancher.
Cloud providers like AWS, Microsoft Azure, and Google Cloud Platform may benefit from fleeing customers who seek to accelerate cloud migration plans or opt for a cloud-native approach rather than using a VMware-based solution on their platform (i.e., choosing EC2/S3 instead of VMware on AWS).
Another big question is the impact on strategic partnerships. VMware hosting partners such as IBM, Lumen Technologies, Rackspace, and OVHcloud could be heavily impacted if any changes are made to existing pricing models, product development roadmaps, or collaboration agreements with both managed service providers (MSPs) and customers. Also unknown is whether these partner roles will evolve to be MSPs of cheaper hosted environments or as consultants that may help accelerate migration.
Undoubtedly, the acquisition would dilute VMware’s value proposition as a leading end-user computing vendor, making additional room for major competitors like Microsoft to gain market share from VMware’s VDI and endpoint management product lines (i.e., Horizon and Workspace ONE). The strength of VMware’s end-user computing portfolio has long taken a back seat to the company’s infrastructure offerings, and integration into the plethora of Broadcom software offerings would only obscure the value even more so. This presents an opening for Microsoft to position its competing offerings such as Azure Virtual Desktop and Microsoft Endpoint Manager as easier to consume, deploy, and manage.
What Does The Future Look Like In A Broadcom/VMware World?
With any acquisition, the new arrangement has the potential for a “better together” story. In this case, the meaningful synthesis would be in monitoring and modernization. Both Broadcom and VMware have existing monitoring products that, when combined, could prove beneficial for customers. Broadcom’s AIOps and Observability is a broad software portfolio that focuses on network, application, infrastructure, and digital experience monitoring (DEM). These offerings could complement VMware’s digital employee experience management capabilities, which primarily serve endpoint and mobile health. The combination could catapult Broadcom into an AIOps and Observability leadership position. At a minimum, it would send strong ripple effects throughout the DEM market. A Broadcom/VMware offering would mean full visibility from the cloud to any endpoint, including mobile and virtual endpoints. The pairing could hurt VMware further, however, if Broadcom continues to invest in end-user experience capabilities on the endpoint, rendering VMware’s contribution less relevant.
A VMware acquisition means that Broadcom can market itself as the modernization platform — where companies can transition workloads from any legacy system by using new cloud-native technologies. A combined Broadcom and VMware could create a behemoth that holistically tackles any workload modernization challenge, thereby delivering the greater goal for many enterprise customers: to embrace cloud-native without overdependency on any cloud provider. Will it? Given its track record, it does not seem likely. Ultimately, if you’re a VMware shop, you’ve got to make the call in the near future.