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The Federal Trade Commission continues to drag its feet on approving Broadcom Inc.’s acquisition of VMware Inc. Ironically, in our view, these delays only hurt the very competitive environment the FTC claims to be protecting.
The artificial intelligence era is accelerating at a breakneck pace and the Big Three hyperscale cloud vendors already have a sizable lead on legacy incumbents. If preserving competition is truly the agenda of the U.S. government, it should recognize that VMware, its enterprise ecosystem and market forces have the potential to neutralize cross-cloud complexity and give customers a viable alternative to increasingly powerful public cloud players.
In this Breaking Analysis and ahead of VMWare Explore 2023, we revisit our views on Broadcom’s rationale and likely actions post-acquisition. We’ll share current Enterprise Technology Research survey data to place VMware’s position in context to the major cloud players, speculate on its AI agenda and give a preview of next week’s VMware Explore. To do so, we welcome theCUBE analyst Rob Strechay and a friend of theCUBE, Zeus Kerravala, principal of ZK Research.
Broadcom has a dizzyingly successful track record of mergers and acquisitions, including LSI, Symantec, Emulex, Computer Associates and dozens of other firms that Chief Executive Hock Tan has orchestrated. As shown in this Broadcom slide above, the company looks for leading firms with a sustainable advantage, loyal installed bases, and proven and predictable operating histories. Broadcom, as shown on the highlighted bottom right corner, is targeting $8.5 billion in EBITDA contribution from VMware post-acquisition.
Some of the things Hock Tan has said about his strategy and the VMware acquisition are shown below.
He has said many times, for example that “we don’t compete directly in CPUs… essentially we don’t play in games we can’t win.” He has also laid out his premise for VMware — a multicloud approach for customers that absolutely need or want some portion of their data to stay on-premises. Above, he uses the term sovereign cloud, a play off the phrase data sovereignty.
And the last point above recognizes the importance of the ecosystem in extending VMware’s value proposition and providing alternatives to the public cloud It’s a clear indication Hock Tan understands and values VMware’s ecosystem.
There was hope that the VMware deal would close by VMware Explore. Broadcom has said it will close by this fiscal year, which ends in October and perhaps it gets pushed into next fiscal year.
Here’s a summary of the analysts’ views on the Broadcom acquisition of VMware. The acquisition stands out for several reasons:
Bottom line: The acquisition of VMware by Broadcom signifies a strategic extension of Broadcom’s investment approach to add more software acquisitions. We don’t believe Broadcom necessarily has a target mix of software and semiconductor revenue, rather it’s looking for good businesses that fit its business model. VMware, with its potential for growth and positioning in the multicloud arena, can be a pivotal component for Broadcom’s future. The challenge remains in how Broadcom will streamline and optimize its vast software offerings post-acquisition.
The chart above compares the trailing-12-month revenue and other key metrics for the two companies. For people not familiar with Broadcom, this snapshot is astounding. Broadcom is a $34 billion company with nearly 50% free cash flow margin and only 20,000 employees. Its revenue per employee is an incredible $1.7 million. This financial performance is why the company’s market value is an impressive 10 times its revenue.
VMware is a $13 billion company with 38,000 employees. Its revenue per headcount is $350,000, which is actually quite good for a software company. But given Broadcom’s pro forma target of $8.5 billion of EBITDA contribution that means to be a positive for Broadcom, VMware’s performance will have to blend more closely with Broadcom’s financials.
Here’s a summary of the analysts’ take on VMware and the potential strategies to integrate and optimize the acquired assets.
Bottom line: Broadcom’s acquisition of VMware presents a strategic opportunity to leverage VMware’s unique position in the emerging multicloud era. Through careful integration, reorganization and a systems approach, Broadcom has the potential to streamline VMware assets and drive value, optimizing VMware’s offerings with better focus.
Broadcom has emphasized phase 3 of VMware’s growth as multicloud and a platform for applications. The slide below was created before the AI craze, so there may or may not be some marketing adjustments to Broadcom’s positioning. Regardless, we know VMware is betting on solving multicloud chaos.
In the following section we assess the degree to which multicloud complexity is a real problem and what VMware’s advantages are in the market.
Bottom line: VMware is well-positioned to play a critical role in the multicloud or supercloud era. However, its success hinges on how effectively the company can integrate, adapt and leverage current assets, especially vCenter, in the ever-evolving cloud landscape. The slowness of the FTC’s decision on the acquisition is not helpful to accelerating customer value and competition.
Below is a graphic from ETR that puts VMware’s position in context. On the vertical axis is Net Score or spending momentum. The horizontal axis represents the pervasiveness in the data set and the overlap that these platforms have in the survey of more than 1,700 IT decision makers. The red dotted line at 40% indicates a highly elevated Net Score.
The key points are that the Big Three clouds have the momentum and Azure and that AWS has a dominant market presence. But look at VMware all the way to the right. There’s a 50% overlap meaning half of the accounts cited that they are running VMware. So VMware’s presence is comparable to Microsoft and AWS.
We’re also showing the positions of solutions in VMware’s portfolio with VMware Cloud on AWS as the most prominent on the Y axis. And you can see the others.
What follows is a summary of the analyst discussion including the position of VMware relative to the hyperscalers and the utility of the balance of VMware’s portfolio – for example, vSAN, NSX, VCF, Carbon Black and others.
Bottom line: VMware’s potential to reshape the multicloud landscape is evident, especially with its tools and partnerships. However, its success hinges on strategic decisions, especially regarding its product portfolio and partnerships, and understanding and adapting to regulatory landscapes.
Our observations suggest that Hock Tan is not a big hype guy. He doesn’t make decisions based on market chatter. So when he’s asked about AI, he most certainly doesn’t AI-wash. He looks at AI as just another workload and something that will make infrastructure run better. But if VMware is going to be a platform for app development, it will have to unveil its AI strategy at VMware Explore.
Let’s look at how VMware stacks up against the hyperscalers in AI accounts.
The chart above has the same XY – spending velocity and market presence and the same platform comparisons. The difference is the data is filtered on 574 AI accounts in the ETR data set. There are two interesting points in the data that stand out:
In last week’s Breaking Analysis, we laid out the case for on-prem versus public clouds in terms of where customers will run large language models. And the conclusion was that the cloud players had a clear lead in terms of innovation, optionality and functionality… but the incumbent on-prem players have the advantage of customers wanting more control given the fear, uncertainty and doubt around intellectual property leakage, legal and related risks. And edge is a latency game that is wide open.
Here’s our analysis and summary of the challenges and potential of incorporating AI in on-premises solutions and how it could shape the future of VMware and the broader IT landscape.
Bottom line: AI is increasingly influencing the IT landscape, with ramifications on spending patterns and technology adoption. Although VMware seems poised to leverage this trend, the success might hinge on how effectively they can address software gaps and fortify data partnerships to provide more competitive AI solutions.
One of the things we hear from developers is that they really like the innovation in the public cloud. They especially point to the optionality of AI. For example, having access to foundation models in a repo such as Bedrock on Amazon is appealing. And we’re seeing the striking ascendency of OpenAI adoption. The chart shows the Net Score and presence of AI platforms within a filter of 886 VMware accounts. It gives us an indication of which tools are popular in those accounts and presumably represents some of the partners that VMware should target.
First, look at OpenAI: It has overtaken all vendors in the ETR data set across the board in terms of spending velocity with an 87% Net Score – and a very high N – second only to Microsoft, which is its biggest partner.
The hyperscalers are prominent as well and VMware partners with each of them. You can see the other players such as Databricks Inc., Dataiku Inc., Anaconda Inc., SparkCognition Inc. and the like.
But when we think about VMware’s ecosystem we think first about Dell Technologies Inc., Hewlett Packard Enterprise Co., IBM Corp., NetApp Inc., Pure Storage Inc., Veeam Inc. and many others that are lower in the stack. The hyperscalers are also strong partners of VMware because of VMware’s massive presence in the market.
But you don’t typically think of these AI names shown above. The question we debated is: How does VMware become relevant in AI? And what are the challenges and prospects related to developing a full-fledged AI infrastructure?
Bottom line: As AI becomes increasingly integral to the IT landscape, challenges and opportunities arise in equal measure. For companies such as VMware, strategic partnerships, leveraging open-source solutions and emphasizing networking can pave the way for a stronger AI presence. The tech ecosystem also seems ripe for diversification, potentially favoring entities that can offer competitive alternatives to industry giants.
Let’s close with some expectations for VMware Explore next week.
We don’t expect to hear much on the Broadcom acquisition, but we definitely expect to hear more about VMware’s AI play. It’s compulsory in any tech event these days. We’ll also hear about VMware’s cross cloud services and related product extensions around Tanzu, Aria and other developer projects. And it’s likely we’ll hear many incremental enhancements to the core – for example vSphere, vSAN, NSX and the like. We’ll be listening for any updates on Project Monterey and of course the ecosystem showcase.
Here’s a summary of the analyst discussion on these topics.
In summary, the upcoming VMware Explore event will be a significant indicator of VMware’s strategic direction and priorities. The ecosystem, partnerships, product development and, most importantly, the alignment with Broadcom’s objectives will shape VMware’s journey in the upcoming years.
As with any major technology event, it’s crucial to understand not just what is announced, but also what is left unsaid.
Many thanks to Alex Myerson and Ken Shifman on production, podcasts and media workflows for Breaking Analysis. Special thanks to Kristen Martin and Cheryl Knight, who help us keep our community informed and get the word out, and to Rob Hof, our editor in chief at SiliconANGLE.
Remember we publish each week on Wikibon and SiliconANGLE. These episodes are all available as podcasts wherever you listen.
Email david.vellante@siliconangle.com, DM @dvellante on Twitter and comment on our LinkedIn posts.
Also, check out this ETR Tutorial we created, which explains the spending methodology in more detail. Note: ETR is a separate company from Wikibon and SiliconANGLE. If you would like to cite or republish any of the company’s data, or inquire about its services, please contact ETR at legal@etr.ai.
Here’s the full video analysis:
All statements made regarding companies or securities are strictly beliefs, points of view and opinions held by SiliconANGLE Media, Enterprise Technology Research, other guests on theCUBE and guest writers. Such statements are not recommendations by these individuals to buy, sell or hold any security. The content presented does not constitute investment advice and should not be used as the basis for any investment decision. You and only you are responsible for your investment decisions.
Disclosure: Many of the companies cited in Breaking Analysis are sponsors of theCUBE and/or clients of Wikibon. None of these firms or other companies have any editorial control over or advanced viewing of what’s published in Breaking Analysis.
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