What the $61B Broadcom-VMware Deal May Mean to the Cloud Sector

Analysts from Forrester and Gartner are waiting to see if Broadcom will repeat its ownership approach with VMware, which might make it difficult to compete as cloud competition intensifies.

After some prior hiccups, the European Union’s conditional antitrust approval points to the $61 billion deal more than likely to close, according to Tracy Woo, senior analyst with Forrester. How chipmaker Broadcom’s acquisition of cloud computing and virtualization company VMware will ultimately play out in the cloud sector is a bit harder to determine.

“VMware has really struggled to establish itself as a part of the cloud,” Woo says. “They’ve done some pretty interesting things in terms of being able to innovate, like their cloud management tooling has gotten superior performance, but their bread and butter is in the data center and their virtualization technology.”

Broadcom's Play

Meanwhile, she says, Broadcom has its legacy mainframe business, along with semiconductors and other areas. Broadcom grew during the age when the data center was king, Woo says, and when most everyone’s enterprise infrastructure footprint was also in the data center. “It doesn’t mean to say that they can’t have an effect on the future of cloud and that industry,” she says. “It certainly can. Broadcom is a huge behemoth with a huge amount of capital to build, to make, and affect that change.”

What Broadcom does with VMware, which Woo says might include becoming the software business unit for the company, will play out across a tense cloud landscape. “Right now, the hyperscalers, they aren't necessarily playing nice to each other,” she says. VMware excels, Woo says, in the abstraction layer by creating visibility across cloud providers so the underlying infrastructure, and who the cloud provider is, matters a bit less for users by making multicloud work more seamlessly.

However, if cloud providers start to cooperate, standardizing and integrating some of their services, she says, making it easier for users to not have to rely on tools for that seamless visibility and management, VMware might be dead in the water.

Change will naturally be in order for VMware under new ownership, but the pace that Broadcom wants to see returns on the deal raises some questions with Woo, given the company’s aggressive approach with prior acquisitions. “‘[They] want to achieve $3.8 billion in profitability in three years,’” she says, citing Broadcom’s plans for VMware. “That is a crazy aggressive timeline, and you can only do that by making huge cuts that will drastically impact VMware.”

Competition from the Cloud

The tricky dance between cloud growth and continued on-prem computing could also affect VMware’s place as a huge player in virtualization. Dennis Smith, distinguished VP analyst with Gartner, says about one-quarter of workloads have moved to the public cloud. “That means there’s probably three-fourths of it still on-prem; most of it is on a VMware environment. Some of it may never move into the public cloud. That’s critical workload, where VMware has become the plumbing in many cases of a lot of what organizations do.”

While Smith thinks VMware has a somewhat compelling argument to remain competitive in this market, the company is up against dynamic players. “It isn’t maybe as innovative in many cases as what the cloud providers offer,” he says. “However, it is very much familiar. It is proven. They have familiar customers who have their technology; the question is how many of them will maintain it.”

Virtualization is seeing competitors from the cloud sector chase the market as well, Smith says. “This is the hot area -- that is where the battleground is. This space is hypercompetitive. The cloud providers are jumping in at this. You have Red Hat that’s jumping in. You have Nutanix. This is a really, really hot space. All of the big players that have massive assets, massive IPs are all targeting this.”

How Broadcom approaches ownership of VMware, he says, will surely affect how it holds up against competition for virtualization. Smith hopes will not be a repeat of such Broadcom acquisitions as CA Technologies or Symantec, which saw heavy emphasis on cost savings, staff reductions, and price changes that upset some customers. “They cannot treat this like they did their other acquisitions,” he says. “If they do that, this will be a disaster. But fortunately, their management has at least stated that they don’t plan to. They do not view VMware as being in the same shape as other software acquisitions they have done.”

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