I wrote about mourning the VMware vCommunity in this blog post. However, every technical community evolves as technology changes. The question we should be asking ourselves is: how is Broadcom’s VMware strategy reshaping the virtualization market?
Which segment of the server virtualization market is Broadcom interested in?
Let’s examine this from a business perspective.
In product marketing, we talk about TAM when we start thinking about how to position and market a product. TAM stands for the total addressable market. Put simply, TAM represents the total customer base you could reach if you managed to sell to every potential buyer of your product.
I left VMware at the end of 2019. When I was there, VMware owned 95% of virtualized server workloads. The TAM for server virtualization is still huge, one estimate has it growing to almost $13B by 2032.
It’s clear that VMware doesn’t have that complete market domination it once had. For one thing, the share of workloads owned by VMware has decreased over the years due to the rise of cloud and containerized computing technologies. Additionally, the overall TAM includes VDI (virtual desktop infrastructure), and we know that Broadcom sold off the EUC (End User Computing) business unit which included Workspace One and Horizon.
Now we have a clear picture of the TAM, it’s easier to talk about Broadcom’s VMware strategy. First let’s talk about where Broadcom’s SAM and SOM in this market.
Quick acronym break
But y’all didn’t realize product marketers had their own acronyms, did ya? Let’s break down these acronyms:
- TAM (Total addressable market): the total customer base you could reach if you managed to sell to every potential buyer of your product
We covered the server virtualization market TAM in the section above. One estimate is $13B. - SAM (Service addressable market): This is the section of the TAM a business could realistically target and serve.
Broadcom is bowing out of the EUC portion of the server virtualization market, so we know they are looking specifically at server virtualization. - SOM (Service obtainable market): This is the portion of the SAM that a business could reasonably capture.
These are the customers and verticals that a business will spend time and money on. Broadcom has been extremely clear about who that will be.
Broadcom tightens their focus
Even before the acquisition closed, Broadcom consistently identified the part of the server virtualization market they would go after. This Register article reported on the Broadcom Investor day, where the Broadcom VMware plan was out for investors back in November 2021.
- Broadcom’s VMware strategy: Focus on 600 key customers in highly regulated industries, reducing sales and marketing costs, and trimming R&D by not catering to smaller customers
- Approximately 70% of Broadcom’s ARR (Annual Recurring Revenue) will come from those key customers.
- Broadcom wants to keep the VMware customers with the following characteristics: in highly regulated industries, risk-adverse, “a lot of heterogeneity and complexity” in their IT departments that makes them less likely to change suppliers, companies with high budgets that are increasing quickly, and those that can’t go all-in on the public cloud.
By tightening their SOM to only 600 customers, Broadcom can slash sales and marketing costs. And that’s exactly where the brutal layoffs at VMware have happened. That’s why it makes no sense to us that such talented people were summarily dismissed, and why VMware has slashed personnel to the bone. It is part of Broadcom’s VMware strategy, just business. Of course, that only makes it hurt more.
The Register offered this quote about the commercial customers: “Krause said Broadcom is content to have those 100,000 customers “trail” over time.”
Details of Broadcom’s VMware Strategy
This is image is via the Register article about the analyst briefing. Broadcom’s VMware strategy is laid out pretty plainly in this slide.
But this is not a new strategy for the company. Broadcom used the same runbook after the CA and Symantec acquisitions. For comparison, consider this. Both of those companies spent 29% of their revenue on sales and marketing before their respective acquisitions. Broadcom usually spends 7%. Guess that explains the stripped down VMworld.
Before the acquisition, VMware spent more than 34% of its revenue on sales and marketing. Dropping that spend to 7% will save Broadcom $216M a quarter (according to El Reg). That’s important because Broadcom expects VMware to contribute $8.5B to EBITDA (earnings before interest, taxes, depreciation, and amortization) within three years of the deal closing. Before the acquisition VMware stood at approximately $4.7B to EBITDA. They have lots of work to do.
Their costs are already down. In the first earnings call post-acquisitions The Register reports that CEO Hock Tan said: “Broadcom targeted quarterly costs of $1.4 billion but is on track to exit 2024 with costs at $1.3 billion – and can reduce them further to $1.2 billion.”
VMware prices skyrocket
And of course, the cost for the software has gone up. This tweet, via Jason Thomas, is not unusual.
The academic licensing program and pricing for non-profits have also been suspended. This article talks about a children’s hospital charity that could not afford the increased licensing costs. The charity faced a six to eight times price on their renewal, and they ended up paying the Broadcom ransom. To add insult to injury, Broadcom told them “‘I’m sorry, VMware is not for everyone.”
Broadcom’s VMware strategy certainly is creating chaos in the market. But chaos is what drives innovation.
It will be interesting to see how much headway Broadcom has made with their strategy this year. The Q3 earnings call is coming up on September 5. Want to listen in? Here are the details for how to attend. These calls are always a great way to understand the market better.
If you’re interested in the view from a former Symantec employee who stayed for a year after the acquisition. They lay out the Broadcom acquisition playbook for VMware employees in this blog post.
What does Broadcom’s VMware strategy mean for customers?
Broadcom has a narrow, well-defined SOM for VMware. Broadcom’s VMware strategy is to focus on a small number of customers who will find it better to remain locked-in than to look for alternatives. By doing this, they will reduce their sales, marketing, engineering, and support costs.
I use the word “locked-in” intentionally. Broadcom communicated their plans well before the acquisition closed to only focus on customers who could not easily move to another virtualization platform.
The VMware portfolio has gone from hundreds of offerings to 4. This has led to extreme price increases. But to be honest, that exercise started when I was there. Someone needed to pull that band aid off! However, $8M to $100M is a hard pill to swallow.
According to this CIODive article, Tracy Woo (principal Forrester analyst) called this an effort to divorce their customers. She said, “They’re not trying to play nice and then stab you in the back,” Woo said. “They’re holding the knife right to you and saying, ‘This is what you have to do or you’re out.’”
Broadcom’s VMware strategy is how they are thinning out the 100K customers, and it’s how they are pressuring their top 600 to stay with them. According to the same article, 95% of respondents to a CloudBolt survey see Broadcom’s acquisition of VMware as disruptive to their business, 75% anticipate a price hike of greater than 100%, and only 5% have decided what to do.
Broadcom’s VMware strategy means the wild (competitive) rumpus start!
Finally, there is an opening for true competition in the virtual world! One reason VMware owned the market is because the product is solid. It has every feature an enterprise would want or need.
One thing I found amazing when I worked at VMware is how in step the engineering teams were with the hardware vendors. If there was a new chip or server feature being announced, most times VMware could virtualize it on release day.
VMware just worked. OK, sometimes it was a pain to upgrade it. But that was largely because over the years it became such a critical part of the infrastructure. Systems are harder to update the larger they become.
I mean, come on….who can forget the first time they saw vMotion in action?
VMware became the gold standard because it IS the gold standard! But Broadcom is making it clear that if you want to use the current gold standard, you’re gonna have to pay the ransom. That is going to clear the decks for competition. And that is where the vCommunity comes in.
Expand your view of virtualization and grow the community
VMware != virtualization anymore. Don’t get me wrong, it will probably always be the best package money can buy. This is because Broadcom will concentrate the engineering work to make all the VMware offerings a single, cohesive product. That was a big part of the announcements last week at VMware Explore. However, it will be priced so smaller organizations won’t be able to afford it.
The most pressing problem for organizations right now is choosing a replacement virtualization platform that will fit your business needs. The bigger challenge will be how to migrate your systems over to the new platform. Both of these challenges are meaty technical problems. But that’s exactly what our community does best – figure out solutions to hard technical problems. And then teach everyone else how to do it.
In my next post, I will outline the 10,000-foot explanation of the technical problems. This is where we can dig in collectively and dig out of our grief. Broadcom has made their business decision, now it’s time for us to make our own.
Have you found any interesting solutions or aids for people to move workloads off of VMware? Let us know in the comments!
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