One of the core sales pitches of cloud computing has been the ability to avoid the vendor lock-in of old on-premises and appliance-based computing. With Broadcom acquiring VMware for $61bn, and its track record of ruffling a lot of VMware users’ feathers, the supposed flexibility of cloud-based virtualization is about to be tested.
It seems certain that many VMware customers are going to jump ship. Broadcom’s corporate strategy has been outlined to investors, and it intends to focus on around 600 large customers that are worst positioned to churn away to rivals. Quite literally cornering its market, Broadcom is happy to let smaller customers fall away, with anecdotes suggesting it hikes prices in order to get that ball rolling.
Consequently, many in the video industry are going to have to put this migratory tenet of the cloud to the test. If they find themselves not on Broadcom’s list of preferred customers, they are going to feel the squeeze, and so they need to be able to migrate to another vendor.
This could be a boon for rivals in the WiFi and CPE realms. Gone are the days of dedicated silicon for each specific function. When vendors can virtualize most of those functions inside a fairly generic chip, the silicon wizardry that used to set Broadcom apart is now not a differentiator. With another expansion into the data center and enterprise world, Broadcom does seem to be moving further away from the WiFi CPE and set-top box realm.
Broadcom’s Q2 revenues put semiconductor solutions on $6.2bn, with infrastructure software on $1.9bn. It does not break out semiconductors by product type any further than this. Full year revenue for 2021 was $27.5bn, with operating income at $8.5bn.
VMware has a lot of bloat, in Broadcom’s view. Its latest quarterly numbers put its sales and marketing costs at just over $1bn, with revenues on a shade over $3bn. Due to Broadcom’s cornering strategy, sales and marketing can be slashed almost immediately. On the R&D front, CA Technologies and Symantec have had their budgets trimmed from around 17% of revenue to 14%. VMware’s sits at around 23% currently.
Broadcom is expecting to grow VMware’s annual EBITDA from $4.7bn to $8.5bn, in three years. Following its historic practices should achieve this, where CA Technologies and Symantec’s EBITDA jumped from around 40% to 70% of revenue, but it will upset a lot of VMware customers that are not part of that 600-account VIP club.
Below the 600, the next segment in the customer pyramid is Enterprise, and consists of around 6,000 accounts. Broadcom is only looking to “sustain” them, and will not prioritize R&D to keep them happy.