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VMware customers take wait-and-see approach amid Broadcom changes

April 22, 2024
in Business
VMware customers take wait-and-see approach amid Broadcom changes
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Controversial VMware moves by Broadcom, including revamped licensing terms, have raised many questions, but customers by and large are still evaluating the impact the acquisition will have on their IT strategies and budgets.

When tech giant Broadcom acquired virtualization market leader VMware last October, it restructured licensing terms, laid off thousands of employees, and terminated partner agreements with resellers and service providers.

VMware customers were understandably concerned. Broadcom has made a series of acquisitions under CEO Hock Tan’s leadership, including CA Technologies and Symantec’s enterprise security division, and Tan has often cut marketing expenses and dumped parts of the acquired company that underperform.

The VMware acquisition has been no different. About a month after the deal closed, Broadcom laid off employees and ended perpetual licenses, driving up the price for many customers. In late December, Broadcom terminated all its partner agreements with VMware resellers and service providers, forcing them to reapply.

Tan published a long blog post defending the changes on April 15, suggesting that consumer concerns aren’t going away. Broadcom’s goal is to help VMware customers move fast in their digital transformations, Tan writes. Broadcom engaged with VMware customers as it reworked a go-to-market strategy for the VMware Cloud Foundation (VCF), its comprehensive private cloud offering.

“Early in this process, I concluded that the previous go-to-market model was too complex and costly for VMware and its customers,” Tan wrote. “It demonstrated that all too often, as innovative companies expand, decisions are made incrementally, not holistically as part of a larger, comprehensive strategy.”

Broadcom has focused on a simplified portfolio based on two core products, VCF and VMware vSphere Foundation, Tan added.

Meanwhile, moving to a subscription pricing model makes sense for both VMware and its customers, Tan wrote. Customers that paid for older perpetual licenses can continue to use the older vSphere versions they purchased, he said.

“Subscription licensing is the model all major enterprise software providers deploy today and ensures that customers have the latest and greatest in VCF while providing the kind of predictability needed to fuel continuous innovation for our customers,” Tan wrote.

Tan’s clarifications regarding Broadcom’s strategy and pricing for VMware came amid customer backlash and questions from the European Union regarding how the company has handled licensing and support.

Difficult negotiations

Despite the new licensing terms, it’s too soon to see whether customers will eventually abandon VMware in large numbers. But many companies are seeing significant price increases, says Hubert Selvanathan, partner at digital consulting firm West Monroe.

VMware customers should expect to engage in protracted negotiations, leading to delays, when their VMware licenses come up for renewal, he adds. The number of eventual non-renewals will depend on individual customer needs, including views of competing products and the associated switching costs, he says.

With Broadcom seemingly focused on the large enterprise market, VMware may see the largest number of lost customers in the small to midsize business space. “Taken in conjunction with an anemic economy, there is certainly a heightened potential for customer churn in that segment,” Selvanathan says.

For now, Andrew Cotter, CIO at large equipment financing firm Somerset Capital Group, is sticking with VMware, although he’s concerned about possible price hikes when his company’s VMware licenses are up for renewal.

Somerset Capital also licenses some VMware products through a third-party data center, and the bundled pricing from that provider has limited the price increases so far, Cotter says. But Somerset Capital runs its developer environment in house using VMware.

“As we look at our own licenses, it could be a significant uphill battle on cost structure,” he says. “And the question there is, ‘Do we keep it on VMware? Do we go with something else?’”

One reason customers may be sticking around is because of VMware’s position in the market.

VMware owned about 42% percent of the hyperconverged infrastructure (HCI) market as of late 2022, according to information from IDC. Its market share had stayed around 40% since late 2018, with overall HCI sales increasing sharply during that timeframe.

There are several HCI alternatives available, and at least one competitor has announced a new product since the acquisition. SoftIron introduced VM Squared, a virtualization platform focused on ease of deployment, in March. The private cloud provider pitched VM Squared as a VMware alternative.

But VMware has maintained market share for a reason. “VMware has been the gold standard for virtualization, and, in turn, the gold standard for the technologies that have grown out of that,” says Vishwa Vijoyendra Narayan, director of product management at data management provider Quantum. “VMware has pioneered and compiled a vast array of solutions that cater to an organization’s every IT infrastructure need.”

For example, VMware’s HCI product line has seen widescale adoption in the physical security industry, which needs a reliable video management system insulated from hardware failure, says Narayan whose company offers a competing HCI solution for video surveillance.

While other HCI solutions are available, many are built on VMware’s hypervisor virtualization software, Narayan adds. Still, Broadcom’s changes, including a new annual subscription model, have left many customers uneasy, he says.

“Companies are now scrambling to piece together an HCI solution based on a different hypervisor to avoid the challenges with VMware,” he says. “The problem is that when you are trying to build a reliable solution, it takes months, if not years, to fully test and bring a solution to market capable of handling critical data load.”

Waiting for more changes

Somerset Capital’s Cotter sees the rapid changes after the Broadcom acquisition as creating uncertainty for VMware customers. He questions Broadcom’s decision to discontinue the free version of VMware’s vSphere Hypervisor, called ESXi, in February. That decision, Cotter says, could drive away potential customers.

“It seems to cut off their legs long term, potentially, for training their base of IT professionals,” he says. “Short term, it may be a great revenue stream for them.”

Somerset Capital is considering other options, but the company isn’t in a hurry to make a switch, because its VMware license doesn’t expire for several months. However, the moves Broadcom has made are concerning, Cotter says.

“What else might change?” he says. “What else are they going to force us into while looking for revenue to pay off their acquisition?”

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