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VMware customers warned ahead of Broadcom deal

Gartner offers three key recommendations for VMware customers.

Gartner has recommended VMware customers take active steps to avoid lock-in following its acquisition by Broadcom, as the market expects product stagnation and price rises.

While initial reactions to the news of the acquisition was decidedly mixed, hard research has now confirmed many IT professionals are concerned about the Broadcom VMware deal – especially those who are already Broadcom customers.

Broadcom certainly has form for this: Gartner received “an influx of midsize and smaller customers looking to migrate away due to extraordinary price increases and challenges with support” after Broadcom bought CA Technologies and Symantec.

Accordingly, the research firm is recommending current VMware customers make sure they don’t end up stuck with long-term contracts they can’t get out of, or products which don’t change as customers will need them to.

Three key tasks for VMware customers

Beyond doing an inventory of VMware products in use, Gartner’s three main suggestions were: “Make VMware commit in writing to specific dates for technical enhancements to products you’re using over the next six to 24 months. This is particularly important for products outside of vSphere, NSX and vSAN.

“Make VMware commit in writing to specific dates for technical enhancements to products you’re using over the next six to 24 months. This is particularly important for products outside of vSphere, NSX and vSAN.

“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.”

Gartner’s comments came in a research note from last week, titled: “Quick Answer: How Should VMware Customers Prepare for the Broadcom Acquisition?”

The note also said: “After Broadcom’s acquisitions of CA Technologies and Symantec, numerous customers complained to Gartner about dramatic out-the-door cost increases during renewals, with limited flexibility for negotiations.”

Gartner expects Broadcom to raise prices and “adjust” (which we read as “slash”) R&D, as it did with CA and Symantec. It also expects Broadcom to focus firmly on VMware’s top 1,500 customers – to the detriment of the rest.

Strong negative sentiment from IT professionals

A new survey by 451 Research, part of S&P Global Market Intelligence also revealed strongly negative sentiment around the VMware Broadcom deal, especially around current Broadcom and VMware customers. Fifty-six percent of the latter group surveyed had a negative reaction to the deal, with 27% being very negative – compared to only 40% negative among the total survey group.

“This could be due to negative experience of past Broadcom software acquisitions (such as CA and Symantec), fuelling fears concerning the handling of VMware tools that are considered important to their businesses,” said 451 Research.

“The three main worries on the list are that the pace of innovation will be stifled, the general lack of obvious synergies between the two companies, and the potential impact on software licensing terms and conditions. Given the experience of CA and Symantec users over the past few years, such fears seem to have some grounding in reality,” it added.

Ex-VMware exec predicts 70% job cuts

A former VMware insider also came out with an analysis of why VMware staff (and also VMware customers) should be concerned about the future of the company. Brian Madden, distinguished technologist at VMware’s End User Computing business unit until February this year, suggested Broadcom would slash VMware’s staff by around 70%.

“Broadcom said they expect VMware to add $8.5B per year in EBITDA within three years. VMware’s fiscal 2022 EBITDA was $3.5B. In other words, Broadcom’s goal is to extract 5 BILLION EXTRA DOLLARS from VMware, per year, every year, starting in 2025 or so,” Madden wrote on LinkedIn.

“VMware has almost 40,000 employees. There's no reason to believe Broadcom’s history of cutting ~70% of acquired employees will be any different with VMware. And again, this is just math. Broadcom currently has about double VMware's revenue ($27B vs $13B), but with about half the employees (20k versus 40k).

“So Broadcom today gets a 4x better return per employee than VMware. In Broadcom land, $13B in revenue should align to about 10,000 employees, not 40,000 (there's your 70% cut). Broadcom is not spending $70B [including debt] for VMware to go from a $27B 20k employee company to a $40B 60k one,” he added.

Against all this, Broadcom and VMware have been making reassuring noises about continuing with R&D, and even accepting a lower margin on VMware offerings than those from other parts of Broadcom.

But based on Broadcom’s form, VMware customers should probably be planning for the worst.

UPDATE 10 June 2022, 00:14 BST

When asked for comment, a VMware spokesperson told The Stack: “It is too early to make assumptions about the outcome of the acquisition announced by Broadcom. While change can be difficult, we view the unsolicited proposal and subsequent transaction agreement as an opportunity to accelerate our multi-cloud strategy. Following the closing of the transaction, Broadcom Software Group will operate and rebrand as VMware, incorporating Broadcom’s existing infrastructure and security software solutions as part of the VMware portfolio.

"Combining our assets and talented team with Broadcom’s existing enterprise software portfolio, all housed under the VMware brand, will create a remarkable enterprise software player, with a continued focus on technology innovation. Collectively, we will deliver even more innovation to customers, enabling them to thrive in this increasingly complex multi-cloud era.”

Broadcom has also been approached for comment.

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