VMware Customers May Have Questions About Broadcom’s Sudden Shift to Enterprise Software

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Investors continued to take shares in Broadcom and VMware on Thursday after word of their $61 billion union became official, but some VMware customers may have second thoughts.

VMware controls more than 70% of the global virtualization infrastructure software market with more than 500,000 customers, according to Gartner. VMware has planted almost every data center, connecting applications in the cloud hemisphere.

For Broadcom, known for developing semiconductors, the deal (a 44% premium to VMware’s pre-rumored stock price) is a sudden and strategic shift. VMware will account for 49% of software sales and will retain its brand.

Some CIOs may scratch their heads and think twice.

“Broadcom is not a company that should even be on the CIOs’ map before this acquisition. They make chips,” said Keith Townsend, CEO and Founder of The CTO Advisor.

This is Broadcom’s third and largest acquisition in three years. Analysts note that VMware’s technology innovation has stalled and wonder if Broadcom is looking for a cash cow.

Broadcom spent $18.9 billion on IT management software and solutions company CA Technologies in 2019, a company known for its mainframe software. The following year, it purchased Symantec’s enterprise security business for $10.7 billion.

“And what has Broadcom done with these two brands since they were acquired? For lack of a better term, it’s basically rent extraction,” Townsend said.

Broadcom said it plans to nest its software arm under the VMware brand, which will result in an expanded portfolio of infrastructure and security software solutions.

“If I were a CIO, I’d be concerned that the partner I’m looking for to help me understand cloud native and this transition from my traditional VM-based operating model will no longer focus on that. cross-mission cloud,” he added.

And although VMware has invested in Kubernetes, its core product remains virtual machines.

Analysts say the VMware purchase epitomizes Broadcom’s past deals in enterprise technology – buy legacy brands and reap the dividends without investing heavily in innovation.

News of VMware’s new parent company comes just months after Dell Technologies completed its spin-off. VMware paid a special cash dividend of $11.5 billion to its shareholders, or approximately $9.3 billion went to Dellwhich controlled more than 80% of VMware.

The spin-off helped pay off debt incurred by Dell in its merger with EMC in 2016, which created Dell Technologies. To date, Dell Technologies has a market value of $33 billion.

Technological stagnation

One possibility for VMware’s future is to operate as it has in the past: independent and away from the mothership.

VMware remained a key, largely solo technology provider under the EMC umbrella.

The company has built and nurtured a self-contained identity because of its commitment to material agnosticism and working across ecosystems, Annand said.

As popular as it is, VMware’s core product is on autopilot, with low investment and high margins, Forrester senior analyst Naveen Chhabra said via email.

In fact, most of the enterprise infrastructure space is on autopilot.

Packet Pushers Interactive co-founder and research analyst Greg Ferro sees enterprise technology going through 10-20 year innovation cycles.

Virtual machines became the norm in the mid-2010s when companies turned to them for operational reasons: fewer servers, more space in the data center and easier to back up.

Businesses will continue to use infrastructure technology, but it’s a market segment that doesn’t require much innovation. The technology curve will shift as more companies move out of data centers.

This gives rise to what Ferro thinks is the key element of the deal, the same sentiment shared by Townsend: “rent extraction”.

Broadcom could cut research and development — saving the more than $3 billion spent annually by VMware — and reduce sales force and operating costs, but still capture revenue from VMware’s loyal customer base.

Until the acquisition is complete, questions of long-term strategy are speculative. Meanwhile, as integration plans are put in place, threat actors are dogging commodities and avoid patches.

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