Broadcom: Change VMware from a perpetual license to a subscription model
Broadcom: Change VMware from a perpetual license to a subscription model.
On May 26, 2022, Broadcom said that VMware “will rapidly change from a perpetual license to a subscription model” following its $61 billion acquisition of VMware.
That ‘s what Tom Krause, president of Broadcom’s software group, said on Broadcom’s earnings call on Thursday.
Over the three years following the deal, VMware will add roughly $8.5 billion to Broadcom’s projected earnings before interest, taxes, depreciation, and amortization (EBITDA) — a substantial increase given VMware’s current EBITDA of about $4.7 billion.
He was asked at the time how the semiconductor giant planned to achieve this vision: Subscriptions were the answer.
Krause has also repeatedly stated that Broadcom intends to focus on deepening VMware’s key product portfolio, and is pleased to jointly acquire the sales organization and channel relationships, thereby giving Broadcom access to a market breadth it currently cannot match.
Broadcom’s sophisticated sales efforts reflect its philosophy: CA Technologies does best when it focuses on Fortune 500 companies through direct relationships.
After Broadcom acquired Symantec’s enterprise products, Krause said Broadcom’s decision to focus again on the big global players could explain why Symantec’s marketing efforts have become less visible after the acquisition, with smaller customers feeling vulnerable Left out, some small customers have started looking for new suppliers.
Clearly, this is unlikely to be repeated with VMware.
Both Krause and Broadcom CEO Hock Tan said Broadcom plans to manage VMware’s more than 300,000 customers well.
There will clearly be a transition to a subscription-based licensing model in the next few years.
Hock Tan said: “We will ensure that VMware’s large customer base is well supported.
This is the business foundation on which our future development will depend.” This errand will be handed over to channel partners.
“We don’t want to leave the channel, we want to embrace the channel,” Hock Tan said.
Hock Tan added: “Frankly, whether it’s perpetual licenses or subscriptions, the goal is the same. In a sense, we are redesigning the contract from perpetual licenses to subscriptions. Because of the licensing model shift, VMware is also There may be a quandary of slower growth in the short term.”
Krause said Broadcom is willing to accept that VMware’s profits are lower than the company’s and Symantec’s expectations, and the R&D segment will benefit from it.
The software leader has committed to continued investment and innovation in VMware’s core infrastructure products (i.e. vSphere, VSAN, vRealize and NSX), which Broadcom has long valued and focused on.
Tan and Krause were full of praise for VMware’s sales force, though Broadcom’s slideshow announcing the deal mentioned “improving the efficiency of sales and marketing through prudent go-to-market investments and focus on existing customers.”
Combined with Broadcom’s plans to consolidate back-office functions, and the company’s policy of keeping general and administrative expenses at 1 percent of revenue, it’s clear that VMware’s payroll will see some cuts.
Tan also said the acquisition of VMware would mean Broadcom gaining another 1,000 or so large customers, adding that the virtualization software giant would allow Broadcom to help those users manage the entire application lifecycle from development to long-term use.
In the short term, Tan expects VMware’s product portfolio to help companies with complex IT systems update applications and more easily consider public cloud migrations.
But because Broadcom’s big customers tend to be highly regulated entities, Tan believes private cloud remains a huge opportunity for VMware.
Hock Tan also said that AOC’s developer tools will complement VMware’s Tanzu product portfolio, potentially making it more attractive to developers, or to those of the more than 1,500 major global companies that Broadcom wants to win over. important.
Michael Warrilow, research vice president for infrastructure software at Gartner, who closely follows VMware, said the research firm’s advice to clients is to “exercise caution.”
Warrilow said customers need commitment from Broadcom on VMware’s pricing and product roadmap, because Broadcom has a history of raising prices for acquired companies’ products.
“Don’t think it’s business as usual,” Warrilow said.
He also advised VMware customers to start developing contingency plans in case they need it.
He also suggested that customers considering VMware’s Tanzu cloud-native application development portfolio should “stop” exploring the portfolio until they can better understand Broadcom’s intent.
Tanzu is VMware’s weapon in expanding its appeal beyond infrastructure management into other areas, so it won’t be good news for Broadcom if customer interest pauses or wanes.
Customers are also likely to push back against Broadcom’s aggressive move to a subscription, since such a change rarely results in a price drop, and some users have very good reasons to prefer perpetual licenses.
VMware’s products are already considered expensive, and your company may already have quotations in your inbox from a hypervisor challenger wondering if now is the time to consider more aggressive marketing.