Broadcom has signaled its $61 billion acquisition of VMware will involve a “rapid transition from perpetual licenses to subscriptions.”
That’s according to Tom Krause, president of the Broadcom Software Group, on Thursday’s Broadcom earnings call. He was asked how the semiconductor giant plans to deliver on its guidance that VMware will add approximately $8.5 billion of pro forma EBITDA to Broadcom within three years of the deal closing – significant growth given VMware currently produces about $4.7 billion. And subscriptions was the answer.
Krause also repeatedly said Broadcom intends to invest in VMware’s key product portfolio and is pleased to be acquiring a sales organization and channel relationships that give it reach Broadcom does not currently enjoy.
Broadcom’s narrow sales efforts reflect its belief that CA Technologies does best when focused on Global 500 companies through direct relationships. Krause said that when Broadcom acquired Symantec’s enterprise products, it decided to again focus on those global whales – which explains why post-acquisition Symantec’s marketing efforts became much less conspicuous and smaller customers felt so actively unloved that some sought new suppliers.
A repeat of that plan is not on the cards for VMware, apparently. Krause and Broadcom CEO Hock Tan both said Broadcom plans to nurture VMware’s 300,000-plus customer base. The move to subscription-based licensing will apparently happen over the course of the next few years.
“We will make sure they are well supported,” Tan said. “This is a business base that we will grow.” Channel partners get that job. “We don’t want to walk away from the channel,” Tan said. “We want to embrace it.”
“Whether it’s perpetual or subscription, frankly, it’s the same,” Tan added. “We are, in a sense, restructuring the contracts from perpetual to subscription.” VMware may also experience slower growth in the short term due to the licensing shift.
Krause said Broadcom is willing to live with lower margins for VMware than it expects from CA and Symantec, with R&D to benefit as a result. The software boss pledged ongoing investment and innovation for VMware’s core infrastructure products, naming vSphere, VSAN, vRealize and NSX as the subjects of ongoing love and attention.
Tan and Krause heaped praise on VMware’s sales force, though the Broadcom slide deck [PDF] announcing the deal mentions “Sales & Marketing efficiency gains through prudent go-to-market investment and focus on existing customers.” Combined with Broadcom’s plan to consolidate back office functions, and company policy to keep general and administrative expenses to one percent of revenue, it is clear some cuts are coming to VMware’s payroll.
Tan also indicated that buying VMware will mean Broadcom gains another thousand or so big customers to work with, adding that the virtualization giant will allow Broadcom to help those users to manage application lifecycles from development to infinity and beyond.
In the shorter term, he expects VMware’s portfolio will help companies with complex IT fleets to modernize apps and consider public cloud migrations more easily. But, as Broadcom’s big customers tend to be highly regulated entities, the CEO feels that private cloud will remain a big opportunity for VMware.
Tan also suggested that CA Technologies’ developer tools will complement VMware’s Tanzu portfolio, and perhaps make it more attractive to developers – or make it more relevant to developers at the 1,500-plus global whales Broadcom wants to keep close.
Don’t assume business as usual
Gartner research vice president for infrastructure software Michael Warrilow, who covers VMware, told The Register the analyst’s advice to customers is “proceed cautiously.” Warrilow said customers need to get commitments on VMware’s prices – because Broadcom has hiked bills for acquired companies’ wares in the past – and on product roadmaps.
“Don’t assume business as usual,” Warrilow said. He also advised VMware customers to start contingency planning. And he suggested that customers considering VMware’s Tanzu cloud-native application development portfolio should “stop” their explorations until Broadcom’s intentions can be better understood.
Tanzu is VMware’s bid to extend its appeal beyond infrastructure management, so if customer interest pauses, or fades, that’s not great news for Broadcom.
Customers may also push back against Broadcom’s aggressive move to subscriptions, as such changes seldom result in lower prices and some users have very good reasons to prefer perpetual licensing. VMware’s products are already considered expensive, and your correspondent’s inbox already contains an inquiry from a hypervisor challenger wondering if this is the moment to consider more aggressive marketing. ®