In May 2022, Broadcom semiconductors announced that they were planning to buy VMware in a mega cash and stock deal worth $61 billion. Existing shareholders will receive about $142.50 per share. The agreement was in the final stages of closing and experts expect the deal to fall over the line in Q4 2022.
Analysts are concerned that the deal and the plan to revamp the existing license model will drive customers away from a business that has already had to adapt significantly to stay relevant in today’s market conditions. In addition, there are fears that the move to a subscription model will alienate loyal customers embedded in the virtualization ecosystem.
What Is VMware?
VMware Inc, founded in 1998, was the leading pioneer in bringing virtualization technology to the mainstream. VMware has set industry benchmarks for virtualization standards for over 29 years, and its various products are embedded in most data centers across the globe.
VMware has created numerous hallmark software products over the years; notable mentions include vSphere, vCenter, vRealize, SRM, NSX, vSAN, Horizon, VMware Cloud, and VMware Workstation.
They are still regarded as a global leader despite the mass adoption of cloud computing. They have remained relevant in recent years by embedding VMware with cloud service providers as a dedicated managed platform.
Products like vSphere and ESXi still dominate private clouds and on-premise virtualization stacks, but there has been a decline in their usage in the last ten years. Apart from VMware Cloud, most VMware products use perpetual software licenses which remain valid for the product’s lifetime or a fixed number of years as agreed in a reseller’s contract. Users are free to use the VMware product indefinitely.
VMware licensing has traditionally been simple, not necessarily cheap, but indeed easy to use. However, there are caveats to the current licensing model, such as that the number of processor sockets installed in the host server(s) and the feature set you received varies on the license type purchased.
Dell currently owns VMware, and financial observers have suggested that Dell kept the VMWare operating model in place to keep the company ticking along. On the other hand, Broadcom has a proven track record of running a lean and highly profitable business with a gross margin of about 70%.
There is no doubt that Broadcom wants to monetize VMware; it plans to do this by investing heavily in its core products, such as vCenter and vSphere, and will likely look at VMware Cloud on AWS as that service is growing at 40%. In addition, they will focus R&D spending on developing products, so niche products like Horizon and SRM could potentially divest and be dropped.
There is no doubt that Broadcom is an efficient, highly profitable business. However, the news of changing the licensing model has spooked customers. Broadcom CEO Hock Tan has even said they expect to lose customers in the short term, and customers are worried the takeover will stall innovation and increase costs across the board.
What Is the Expected Impact on Customers?
The impact will depend on several factors, such as how many years remain on your existing VMware contract and how embedded the business is in the VMware ecosystem. Gartner, a consultancy business with a solid reputation for advising business decisions, has much to say about the acquisition.
Gartner recommends that VMware users “Identify exit ramps for deployed products, including alternative solutions and migration activities.” This should include immediate negotiations on contract extensions to lock into a predictable fixed-term contract. Also, consider your business’s exit strategy from VMware; this could be by accelerating your cloud migration strategy or outsourcing your server hardware to a managed service provider.
Either way now is the time to draw up a contingency plan before making new or additional financial commitments to VMware products.
Gartner recommends the following strategy:
- Create a baseline: Inventory all existing VMware products, contracts, and licenses. This step will determine the effects of license model changes on your business and the impact of expected product roadmap changes.
- Roadmap commitments: During negotiations, ensure that VMware commits to a technical roadmap of your products. This is particularly important for products outside of vSphere, NSX and vSAN.
- Price negotiation: Negotiate exit clauses in new multiyear contracts. Negotiate price caps on subscription VMware license fees. Price caps should be within 1% to 2% of a standard metric such as the consumer price index.
- Contingency planning: Identify exit ramps for deployed products, including alternative solutions and migration activities, should the situation become untenable.
Is It Time to Ditch VMWare?
Customers are in a real predicament with VMware, and the Broadcom acquisition has forced the hand of many users to consider seriously if now is the time to double down on VMware or look for alternatives in the market. The good news is that migrating away from VMware is relatively straightforward. Managed services providers like Atlantic.Net can quickly lift and shift entire environments into the cloud.
Established in 1994, Atlantic.Net is a market-leading cloud infrastructure service provider founded in Orlando, Florida. We have grown rapidly over the last 29 years and today offer various cloud services at our seven state-of-the-art data centers based in New York, London, Toronto, San Francisco, Dallas, Ashburn, and Orlando.
Atlantic.Net’s experienced migration specialists have helped countless customers with their vision. As a result, our cloud platform has grown exponentially over the last decade, and we have received many accolades. We offer a variety of dedicated hosting and VPS hosting products and have designed a class-leading service wraparound that simplifies migration. We will be involved as much as you need.