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May 27, 2022

VMware to shift to subscription model after $61bn Broadcom takeover

The virtualisation specialist's new owner is banking on a SaaS model to deliver profit growth in the coming years.

By Ryan Morrison

VMware’s $61bn takeover by Broadcom will hail big changes for the virtualisation giant’s customers, as the chipmaker looks to shift VMware from a traditional license to a subscription model over the next few years in a bid to significantly boost income.

VMware will change its licensing model after the takeover by Broadcom. (Photo: Gabby Jones/Bloomberg via Getty Images)

The change was was revealed by Tom Krause, president Broadcom’s software group during the company’s earnings call yesterday.

He said the $61bn acquisition would involve a “rapid transition from perpetual licences to subscriptions”, with full support for customers during the transition.

Broadcom said it hoped that VMware would add pre-tax earnings of $8.5bn to its software division within three years of closing the deal. Last year its EBITDA was $4.7bn on revenue of $12.9bn.

VMware revenue growth achievable

The $8.5bn target is an achievable one says Bola Rotibi, analyst at CCS Insight. “I don’t see any reason why that can’t be done,” she says. “If you think about VMware’s revenue, last year it was $12.9bn, up 9%, which is already a substantial amount.”

Moving to a subscription model is a way to achieve the financial target Broadcom has for VMware, Rotibi adds. “VMWare has been increasing its subscription software over the last year,” she explains. “It has a strong trajectory to move everything to a SaaS model, and VMware’s plan is to have that across all of its portfolio by 2023 so that doesn’t surprise me.”

Broadcom has significant expertise in software licensing models in-house already thanks to its previous acquisitions of software company CA and cyber security vendor Symantec, says Steven Dickens, senior analyst at Futurum Research. “CA were very adept at software licensing in fact it was a core competency as they have been in that business for decades,” he says.

As well as raising revenue from VMware, Broadcom plans to invest in its main product portfolio and infrastructure products including vSphere, VSAN, vRealize and NSX. Broadcom CEO Tan Hock Eng told investors that growth was likely to be slower in the short term as the licenses were changed.

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Broadcom pits VMware head-to-head with IBM

Dickens says VMware's Tanzu, a suite of products developed to help users run and manage multiple Kubernetes clusters across public and private clouds, offers real growth potential for the company.

Rotibi says Broadcom wants to use Tanzu, and VMware's other products, to compete with IBM. “I think Broadcom is going head-to-head with IBM, which has Red Hat and Openshift, that is their unifying platform," she says. "VMware has Tanzu as the modern application. They are more snapping at IBMs heel than they were before this acquisition.”

Tan told investors CA Technologies' developer tools could be integrated with Tanzu, as the two complement each other and a combined proposition would be more attractive to developers.

“In the short time Tanzu has been around it has done well for itself – it captured a strong community," Rotibi adds. "I think there complimentary stuff from CA but in terms of strategic direction, they’ll have a better marketing and messaging with Tanzu.”

Broadcom hopes to capitalise on VMware's sales expertise. Tan praised the company's sales division on the earnings call, but said the two businesses would be able to make “sales and marketing efficiency gains through prudent go-to-market investment and focus on existing customers”. This could mean job cuts. “Its always going to be a problem when you have two big companies integrating,” Rotibi said.

Could other companies hijack the VMware Broadcom deal?

Though no regulatory opposition is expected, other bidders for VMware could emerge. The company has a 'go-shop' clause written into the agreement, according to an SEC filing. This would allow it to solicit offers from other parties until 5 July, paying a $750m break fee to Broadcom if it goes with someone else.

Dickens suggested before the deal was confirmed that “the likes of HPE, Cisco and Lenovo would be interested and then Salesforce are also very acquisitive so I wouldn’t rule them out".

Steven Schuchart, principal analyst at GlobalData says he believes it is unlikely a rival to Broadcom will emerge. “I do not believe that there are other bidders in the wings, at least not at this time," he says. But such things are often very hush hush, I’m surprised that we even found out about the Broadcom effort before it was done.”

Read more: Why is there a global chip shortage and when will it end?

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