Will Broadcom Make VMware More Expensive? Five Players Weigh In

VMware partners are confronting customers fears about future pricing under Broadcom with early renewals, exploring rivals, and leaning into the partner’s services.

VMware partner Winslow Technology Group’s chief technology officer, Rick Gouin, said the fear that Broadcom will raise the price of VMware takes one of two paths with his customers: renew or flee.

“I do have some customers doing that, actively renewing subscriptions to hedge against price hikes in the future,” he told CRN. “I also have customers who are evaluating alternative solutions so that they’re prepared and have the ability to move, if and when they need to.”

Broadcom CEO Hock Tan and VMware CEO Raghu Raghuram have each taken turns at addressing what Gartner has called “a very nervous VMware installed base.” Tan wrote about the pricing fears directly in a blog post Wednesday, calling it “top of mind” for customer. He assured them that Broadcom does not need to raise VMware’s prices in order to keep provide a “better product.” Gartner analyst Andrew Lerner told CRN Tan stopped short however of saying the company would not raise prices.

“This blog along with other public statement basically indicate that they don’t need to increase prices,” Gartner analyst Andrew Lerner told CRN. “The good news is it seems like Broadcom is not planning to run the CA/Symantec playbook verbatim, as it relates to pricing. However, to address a very nervous VMware installed base, this falls short of stronger statements like Broadcom won’t raise list prices for 12 months or something akin to that.”

After a 20-day private courtship, Broadcom announced on May 26 it would buy VMware for a combined cash and stock transaction worth $61 billion. In his first remarks on the deal, Tan said Broadcom would reach $8.5 billion in EBITDA within three years. Since, in the trailing 12 months VMware has recorded $3.4 billion in EBIDTA, being able to more than double that had VMware rival Scale Computing speculate that such profitability could only come through layoffs or price hikes.

Here is what the stakeholders have publicly said or told CRN about VMware pricing if a Broadcom acquisition is completed:

Broadcom CEO Hock Tan

Pricing “Top of Mind For Customers”

Over the last several weeks, I have had the opportunity to visit with Broadcom customers around the world to discuss what’s on the horizon as they navigate increasingly complex IT operating environments. During these visits, I’ve also answered their questions and shared our vision of what a combined Broadcom and VMware will look like following the close of the transaction.

It’s clear from these conversations that three topics are top of mind for customers as it relates to the VMware-Broadcom transaction: multi-cloud, cloud-native apps and pricing. Ultimately, what I’ve stressed to them has been straightforward: our customers are and will remain the most important part of our business. That said, I want to discuss each of these topics and share my current thinking to help address the concerns I’ve heard.

We work with our customers every day to tackle a wide spectrum of challenges, and we are constantly innovating to create the next generation of technology to address their needs. This is largely what has made our business successful, and we intend for this to continue.

Our growth into a global technology leader was not based on taking existing products and raising their prices, but by creating technology and products that provide clear value to customers and continuing to improve them. We fuel growth by offering more and better products so customers are using more of our entire portfolio of technology products, rather than just one or two. By delivering long-term value to customers and investing in improved, customer-focused R&D, we can innovate, scale and offer better products without raising prices.

VMware develops technology for the future and addresses a growing market. The Broadcom business case for this transaction is premised on focusing on the business model, increasing R&D, and executing so that customers see the value of the full portfolio of innovative product offerings — not on increasing prices. Following the close of the transaction, we will invest in and innovate VMware’s products so we can sell even more of them and grow the VMware business within enterprises, deepening and expanding the footprint instead of potentially raising prices.

Gartner Analyst Andrew Lerner

“Very Nervous VMware Installed Base”

There is a high degree of concern from Gartner clients regarding this deal and especially from Gartner clients that have prior experience from Broadcom. This is not the level of typical angst associated with any M&A. This falls into the category of major concerns, and from a large number of clients.

One of the top concerns is pricing behaviors, which has been a documented issue with Broadcom in the past. The client concerns are that Broadcom will take-over VMware and alter VMware’s existing customer experience.

Specifically, in order of concern, the types of customer experiences they’re most worried about are: a) pricing -- higher prices, different metrics, limited discounting flexibility, more software audits etc. -- b) product --will they discontinue or spin-out products, or limit future investment, and c) sales/support --- will they reduce my sales/channel resources, will support decline?

After Broadcom’s acquisitions of CA Technologies and Symantec, numerous customers complained to Gartner about dramatic out-the-door cost increases during renewals, with limited flexibility for negotiations.

This blog and other public statements from Hock basically indicate that they don’t need to increase prices.

The good news is it seems like Broadcom is not planning to run the CA/Symantec playbook verbatim, as it relates to pricing. However, to address a very nervous VMware installed base, this falls short of stronger statements like Broadcom won’t raise list prices for 12 months or something akin to that. I believe most enterprises will read this statement “we will invest in and innovate VMware’s products so we can sell even more of them and grow the VMware business within enterprises, deepening and expanding the footprint instead of potentially raising prices” and conclude that Broadcom will attempt to sell them more products, which begs the question – what happens if customers don’t want more products right now?

VMware CEO Raghu Raghuram

“Do an early renewal”

For customers that are worried that Broadcom will come in and raise prices post-close, there’s plenty of time. There are customers who have said, I want to come in and do an early engagement with VMware, do an early renewal, and we are doing that all day long.

For the partners, you have to be aware of that. If customers express a high degree of uncertainty and say, ‘What is VMware going to do?’ Introduce certainty (by offering early renewal).

There is an interoperability covenant that says for deals above a certain dollar figure, Broadcom has to approve. Since the first couple of weeks, since the deal was announced, it has run perfectly smooth. It costs us an extra day or so in those cases because there is a regular process between the Broadcom and us for to approve under the operating covenant.

We are completely approachable. We are here for you anytime you need help with a customer. If you are seeing friction with any sort of orders going through, quotes going through, etc. Its got nothing to do with Broadcom. It’s got more to do with VMware’s process. We introduced some new programs in the second half and we had some teething issues with getting codes through this new process, and approving everything rapidly.

Rick Gouin, chief technology officer with Winslow Technology Group, a VMware partner in Boston

“Customers evaluating alternative solutions”

I think customers are skeptical. I think they look at other acquisitions as potentially an example of how this could go. I think they’re rightfully skeptical. Generally we’re not going to know how this shakes out, for a year-plus, after an acquisition closes. We definitely have some customers who are looking at making long-term subscription buy-ins now. Because they’re viewing it as having a price locked in. I do have some customers doing that, actively renewing subscriptions to hedge against price hikes in the future.

I also have customers who are evaluating alternative solutions so that they’re prepared and have the ability to move, if and when they need to.

Josh Lee, vice president of sales with VirtuIT Systems, a New York-based VMware partner

“That’s why you partner with us”

Broadcom is paying a lot of money for VMware. Are renewals going to get more expensive? Is pricing in general going to cost more? As far as the vSphere is concerned we say, ‘Hey. That’s why you partner with us.’ We’re going to architect your solutions to keep your licensing costs down. If you need the hardware you need the hardware. If you don’t need it were going to let you know where you are buying extra that could cost you more from a licensing standpoint. That’s just part of the game of being a reseller and a consultant, to make sure that we’re actually adding value.