VMware Customers Cautious after Recent Broadcom Actions

VMware

Broadcom, under the leadership of CEO Hock E. Tan, recently closed its $69B acquisition of VMware. Post-acquisition, Broadcom is moving quickly in undertaking several critical initiatives with VMware that, while likely beneficial to Broadcom shareholders over the long term, are causing uncertainty among many VMware customers.

One of Broadcom’s primary strategies to drive revenue growth is shifting VMware's business model from a perpetual license to a subscription-based one. This change aims to provide more predictable and stable revenue streams and aligns with the broader industry trend towards subscription services.

The move, as described by Tom Krause, president of the Broadcom Software Group, during the company’s most recent earnings call, is central to Broadcom’s plan to boost VMware’s contribution to its pro forma EBITDA to approximately $8.5 billion within three years, a considerable increase from VMware’s current production of about $4.7 billion. The emphasis on subscriptions is a key component of this ambitious growth target.

Broadcom's move to subscription models could lead to slower short-term growth for VMware and necessitate restructuring contracts from perpetual to subscription. VMware's strategy includes a trajectory of accelerated growth. The move to higher-value software stacks and subscription sales is expected to drive revenue growth over the next three years.

This transition could also affect VMware's customer relationships, as customers may push back against the shift to subscriptions, which are generally perceived as more expensive than perpetual licenses. VMware's expansion beyond infrastructure management with products like Tanzu could face hurdles if customers pause or reconsider their investments amid these changes.

During its earnings call, the company revealed plans to divest VMware's end-user computing portfolio and its Carbon Black security software unit. This strategic move aligns with Broadcom's stated intent to concentrate VMware's resources and efforts on creating global private and hybrid cloud environments tailored for large enterprises.

The end-user computing portfolio, encompassing desktop virtualization, application publishing, and mobile device management, alongside Carbon Black, a security software unit, are identified as non-core assets and are set to be separated from VMware's main business.

Broadcom expressed a commitment to finding suitable buyers for these units, ensuring they find "good homes," considering that many of their customers overlap with those of VMware's core products. This decision reflects Broadcom's broader strategy to refine VMware's product offerings and focus on areas that align with its vision of developing high-value cloud infrastructure solutions for global enterprises.

The company said that the moves are essential to redirect VMware's efforts towards its primary business of creating private and hybrid cloud environments, which is crucial for large enterprise customers worldwide.

Just days after it closed its acquisition, news emerged that Broadcom is set to lay off at least 2,837 VMware employees. This includes a substantial number at its Palo Alto campus in California, accounting for 1,267 employees, and 577 at its Austin facility.

It's important to note that the actual number of layoffs could exceed these figures since not all layoffs must be reported through WARN notices. The total workforce of VMware globally is around 38,300 employees.

The layoffs are officially attributed to "economic" reasons, although Broadcom has not provided further specifics or justifications. Despite these layoffs, VMware remains a central piece in Broadcom's strategy for its enterprise software segment.

You can look at a company from the perspective of the customer or the stockholder. I’m not a financial analyst, so I’m going to interpret Broadcom’s actions with a view of how those actions might impact an IT organization; after all, the IT practitioner is most directly impacted.

Broadcom's acquisition of VMware represents a strategic pivot that underscores the semiconductor giant's intensified focus on enterprise software. Transitioning VMware towards subscription models is a savvy move that aligns with broader market trends. But this shift may test customer loyalty, as subscription models often imply higher costs over time than perpetual licenses.

The decision to divest VMware's end-user computing and Carbon Black units clearly indicates that Broadcom seeks to sharpen VMware's focus on its core competencies in cloud environments. Such divestitures could streamline operations while also raising questions about future innovation and support for VMware's broader product suite.

Layoffs following the acquisition, while delivering operational cost savings, may have a broader impact on VMware’s innovation trajectory and customer service capabilities. This reduction in force, ostensibly for economic reasons, could introduce risks related to execution and market perception.

Predicting how Broadcom's moves will impact VMware products and services over the long term is impossible. The swiftness with which Broadcom instituted layoffs and product divestitures raises questions about how it will guide VMware forward.

As in any period of uncertainty involving technologies fundamental to critical IT infrastructure, IT organizations are well-advised to comprehensively analyze the risks involved before committing to any significant VMware deployment or renewing long-term license agreements. IT buyers should look to mitigate risks with a dual-vendor approach where feasible.

Many VMware customers are already adopting alternative solutions. Nutanix, VMware’s closest competitor, revealed record growth in its most recent earnings. While much of Nutanix’s growth was driven by its own strategic initiatives, CEO Rajiv Ramaswami acknowledged that the company did “close some additional deals” explicitly because of uncertainty about how the acquisition will unfold.

With the industry watching, Broadcom's stewardship of VMware in the coming fiscal year will be a critical test of its strategic vision for enterprise software dominance. While Broadcom is clearly focused on getting the financial aspects of the acquisition quickly under control, how the company will deliver long-term value to its VMware customers will become clearer.

Until there's clarity, however, IT organizations should continue to act with caution. Mitigating risk, after all, is the number one job for enterprise IT.

Disclosure: Steve McDowell is an industry analyst, and NAND Research an industry analyst firm, that engages in, or has engaged in, research, analysis, and advisory services with many technology companies, which may include those mentioned in this article. Mr. McDowell does not hold any equity positions with any company mentioned in this article.

Broadcom will not axe desktop hypervisor Workstation products after VMware acquisition

In a nutshell: Users and customers of VMware products have one less reason to worry about the future after the Broadcom acquisition. The Workstation line of desktop hypervisors will not be discontinued, or "divested" as the voracious technology conglomerate likes to say, and users will be able to access their fair share of local virtual machines the same way they have done for the past few years.

Soon after completing the much-sought acquisition of VMware, Broadcom began laying off thousands of people and dismantling entire product units, such as the End User Computing (EUC) line. Fear and uncertainty are causing long-time VMware clients to worry about the future, especially considering that Broadcom has made it crystal clear that it aims to transition much of VMware's business into a subscription-based model.

VMware managers have now provided some reassuring news about the fate of Workstation. According to Michael Roy, product line manager for desktop hypervisor products, Hypervisors will continue to exist, and Broadcom seems committed to the platform, both today and "into the future."

Roy explained on VMware's official blog that a new chapter is now beginning for Workstation. Users will continue to be able to purchase their favorite desktop hypervisor Workstation (Pro) applications in the same way they have been for the past few years. "Free for personal use" VM managers Fusion Player (macOS) and Workstation Player (Windows, Linux) will continue to be available as well.

VMware's Workstation products offer IT professionals, power users, and companies the capability to run "hundreds" of 32-bit and 64-bit guest operating systems on local host PCs, without the need to pay for a cloud subscription. Workstation Pro/Player provides one of the fastest VM experiences on the market, with a specific focus on graphics performance that can transform virtualized Windows environments into viable gaming setups – both on PCs and Apple Silicon-based Macs.

The type-2 desktop hypervisor embedded in Workstation shares the same code as the enterprise-class, type-1 native hypervisor ESXi, Roy explained, and they continue to mutually enhance each other. Workstation enables ESXi to support an "immeasurable number" of scenarios and use cases, allowing VMware to test new capabilities. Simultaneously, ESXi contributes to making Workstation the "leading desktop hypervisor," leveraging more than 20 years of investment in enterprise reliability built into the platform.

VMware Workstation relies on a small team that has achieved great results despite facing "all kinds of challenges," as Roy remarked, and it won't be discontinued by the new Broadcom owners anytime soon. The VMware hypervisor platform will continue to improve with new virtual hardware capabilities, enhanced security features, and crucial updates to support new versions of Windows and Linux operating systems.

Broadcom ends VMware perpetual license sales, testing customers and partners

Broadcom has moved forward with plans to transition VMware, a virtualization and cloud computing company, into a subscription-based business. As of December 11, it no longer sells perpetual licenses with VMware products. VMware, whose $61 billion acquisition by Broadcom closed in November, also announced on Monday that it will no longer sell support and subscription (SnS) for VMware products with perpetual licenses. Moving forward, VMware will only offer term licenses or subscriptions, according to its VMware blog post.

VMware customers with perpetual licenses and active support contracts can continue using them. VMware "will continue to provide support as defined in contractual commitments," Krish Prasad, senior vice president and general manager for VMware's Cloud Foundation Division, wrote. But when customers' SnS terms end, they won't have any support.

Broadcom hopes this will force customers into subscriptions, and it's offering "upgrade pricing incentives" that weren't detailed in the blog for customers who switch from perpetual licensing to a subscription.

These are the products affected, per Prasad's blog:

Broadcom is looking to grow VMware's EBITDA (earnings before interest, taxes, depreciation, and amortization) from about $4.7 billion to about $8.5 billion in three years, largely through shifting the company's business model to subscriptions, Tom Krause, president of the Broadcom Software Group, said during a December 7 earnings call, per Forbes.

"This shift is the natural next step in our multi-year strategy to make it easier for customers to consume both our existing offerings and new innovations. VMware believes that a subscription model supports our customers with the innovation and flexibility they need as they undertake their digital transformations," VMware's blog said.

With changes effective immediately upon announcement, the news might sound abrupt. However, in May, soon after announcing its plans to acquire VMware, Broadcom CEO Hock Tan signaled a “rapid transition” to subscriptions.

At the time, Tan pointed to the importance of maintaining current VMware customers' happiness, as well as leveraging the VMware sales team already in place. However, after less than a month of the deal's close, reports point to concern among VMWare customers and partners.

VMware's blog said "the industry has already embraced subscription as the standard for cloud consumption." For years, software and even hardware vendors and investors have been pushing IT solution provider partners and customers toward recurring revenue models. However, VMware built much of its business on the perpetual license model. As noted by The Stack, VMware in February noted that perpetual licensing was the company's "most renowned model."

VMware's blog this week listed "continuous innovation" and "faster time to value" as customer benefits for subscription models but didn't detail how it came to those conclusions.

"Predictable investments" is also listed, but it's hard to imagine a more predictable expense than paying for something once and having supported access to it indefinitely (assuming you continue paying any support costs). Now, VMware and its partners will be left convincing customers that their finances can afford a new monthly expense for something they thought was paid for. For Broadcom, though, it's easier to see the benefits of turning VMware into more of a reliable and recurring revenue stream.

Additionally, Broadcom's layoffs of at least 2,837 VMware employees have brought uncertainty to the VMware brand. A CRN report in late November pointed to VMware partners hearing customer concern about potential price raises and a lack of support. C.R. Howdyshell, CEO of Advizex, which reportedly made $30 million in VMware-tied revenue in 2022, told the publication that partners and customers were experiencing "significant concern and chaos” around VMware sales. Another channel partner noted to CRN the layoff of a close VMware sales contact.

But Broadcom has made it clear that it wants to "complete the transition of all VMware by Broadcom solutions to subscription licenses," per Prasad's blog.

The company hopes to convince skeptical channel partners that they'll see the way, too. VMware, like many tech companies urging subscription models, pointed to "many partners" having success with subscription models already and "opportunity for partners to engage more strategically with customers and deliver higher-value services that drive customer success."

However, because there's no immediate customer benefit to the end of perpetual licenses, those impacted by VMware's change in business strategy have to assess how much they're willing to pay to access VMware products moving forward.