Can Broadcom + VMware move enterprise networking forward?

VMware’s acquisition by Broadcom could mean further development of its 5G, software-defined networking, and multicloud-management initiatives but also higher prices, analysts say.

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Broadcom's planned acquisition of VMware could open opportunities to reach enterprise and telco companies alike with innovative technology. The question is whether Broadcom will let VMware further develop tools for 5G, software-defined networking (SDN), and other technologies.

Semiconductor manufacturer and infrastructure software vendor Broadcom confirmed Thursday that it has reached an agreement to buy VMware in a deal worth roughly $61 billion in stock and cash, subject to closing conditions, including regulatory and shareholder approval.

The merger agreement includes a "go-shop" provision under which VMware can consider alternative proposals from other parties for a period ending July 5, but if the deal stands and wins approval, it is expected to close by the end of January 2023.

Then Broadcom Software Group  and VMware would become part of a VMware-branded business unit. The group has the potential to develop enterprise and telco technologies that could broaden its appeal to users in both sectors, experts say.

VMware SaaS

One of VMware's overarching goals this year was to make all of its major products available as subscription or SaaS offerings.

"Specifically, all of our [software-defined data center] offerings will become available as cloud-delivered software, joining our Tanzu cloud-management, security, and end-user SaaS offerings and will help further accelerate our business-model transformation," VMware CEO Raghu Raghuram said during the company's February financial-analyst call. 

The company has gotten off to a good start in its first fiscal quarter this year, ending May 1, with subscription and SaaS revenue reaching $899 million, an increase of 21% year-over-year. During the quarter, SaaS and subscription revenue accounted for 29% of total revenue, which rose 3% year over year to $3.09 billion.

VMware's roots are in software, and how they move forward with virtualization, network function virtualization (NFV), NSX networking software, and other software technology will be areas to watch, analysts say.

"VMware has made slow and steady inroads across the spectrum of networking technology and innovation over time in a variety of areas—SD-WAN, NFV infrastructure in telecom and enterprise areas, and I would expect that to continue," said Rohit Mehra, group vice president with IDC's Network and Telecom Infrastructure group.

VMware has evolved NSX from a pure network overlay to a network, multicloud, and security platform for cloud, containers, and data-center operations, Mehra noted.

VMware telco technology

The company has also moved further into telco technologies such support for 5G.  Last year it rolled out the VMware Telco Cloud Platform radio-access network (RAN) to let service providers virtualize their RAN operations.

Raghuram has said that helping build 5G infrastructure that reaches the edge and creates a hybrid environment where data-center infrastructure comes with cloud-like features will be a key business driver in the future—a direction Broadcom should be able to continue with its own chips in a variety of telecom equipment.

"VMware has massive ambitions for putting their virtualization stack at the 5G edge," said Keith Townsend, principal with The CTO Advisor. "Broadcom is better positioned in the telco space and may be able to open doors for VMware." 

Potential for smartNICs

Another area that could see synergy between VMware and Broadcom is the development of smartNIC environments that offload server CPU duties onto a separate device to free up CPU cycles and support software-defined cloud, compute, networking, storage, and security services designed for rapid deployment in edge, colocation, or service-provider networks.

 VMware is already developing its Project Monterey environment that melds bare-metal servers, graphics processing units (GPUs), field programmable gate arrays (FPGAs), network interface cards (NICs), and security into a large-scale virtualized environment.

A key component is VMware's SmartNIC, which incorporates a general-purpose CPU, out-of-band management, and virtualized device features. As part of Monterey, VMware enabled its ESXi hypervisor to run on the NIC, which will provide a single management framework for all the compute infrastructure, whether virtualized or bare-metal. 

An agreement between VMware and GPU giant Nvidia — Intel is also a partner — promises to bring its BlueField-2 data-processing unit and other technologies into Monterey.

Some of these projects could complement Broadcom engineering efforts. Broadcom has a smartNIC as well — its Stingray adapter that targets networking, storage and security applications.

Opportunities for multiple product integrations

"There is potential for co-engineering with Broadcom's existing portfolio leading to product integration enhancements," said Gartner Research Vice President Andrew Lerner. "Some potential examples include: VMware Project Monterey with Broadcom's semiconductor business, and Broadcom's ValuOps with VMware Tanzu."

There could also be synergies between VMware's Vrealize cloud-management product line, including Vrealize Automation and Vrealize Operations, and Broadcom's software stack that is based on technology the company acquired when it bought CA, said Forrester analyst Naveen Chhabra. "You could see some product rationalization there," Chhabra said. "Call it fine-tuning."

But it's far from certain that co-development will go smoothly, particularly since Monterey in particular involves other chip makers.

"The companies will have some synergies with software certainly but it's not at all clear how all of the partnerships both vendors have with other big industry vendors and service providers will work in the future," Mehra said.

Other issues surrounding the deal include the possibility of price increases for customers, and whether VMware innovation will thrive under Broadcom ownership, analysts said.

"VMware has strong financials, a large and loyal installed base, and a diverse product portfolio," Gartner's Lerner said. "They have a huge installed-based (500,000+) of enterprise customers using their products within their data centers. Thus, they're deeply embedded and 'sticky' to customers."

But based on Broadcom's track record, it may not be business as usual for VMware customers, Lerner said.

Price increases on the horizon?

"Gartner expects Broadcom to increase pricing for VMware customers and adjust R&D spending, based on Broadcom statements and historical precedent with CA/Symantec," Lerner said, noting that Broadcom spends less on R&D, as a percentage of revenue, than VMware does. "Broadcom has publicly stated that it runs acquired software businesses differently than they were operating previously, to create financial returns consistent with their own 'disciplined' business model."

Customers already have the perception that VMware is expensive, said Forrester's  Chhabra. "Clients have been talking ‘V-tax' [VMware tax] — the market is full of those talks. I think from a recent-announcements standpoint clients will be worried about their price increases, as they've experienced from Broadcom in their earlier acquisitions." 

Price increases could serve to push some customers away. "A number of clients have been asking for alternatives," Chhabra noted.

Innovation concerns

Broadcom 's approach to R&D also raises concerns about innovation.

"Broadcom's intentions at least in the past don't demonstrate that innovation is a priority, so we'll see what happens this time," Chhabra said.

On a positive note, the fact that Broadcom's existing software operations will be brought under VMware, which will keep its name, suggests a departure from earlier acquisition management and that there will be leeway to achieve integration among overlapping product developments.

"Broadcom's decision to rebrand the software group under the VMware moniker indicates a potential adjustment to prior software acquisitions," Lerner said.

User caution advised

But as with any big merger among major technology companies, achieving synergies among multiple and varied product lines is incredibly complex, and users are advised to exercise caution.

Do not assume "business as usual in the long-term," Lerner said. "Validate existing inventory to prepare for licensing changes and/or to explore vendor alternatives. Push VMware for written roadmap commitments and add price-caps and exit-clauses for multi-year license agreements."

(Additional reporting by Jon Gold.)

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