Broadcom’s (NASDAQ: AVGO) acquisition of VMware has been a massive success. Broadcom has made many significant changes to extract value and improve VMware from a financial standpoint. So far, the changes have brought huge benefits to Broadcom.
The semiconductor company reported revenue growth in its software segment of 47% last quarter, primarily due to VMware. Broadcom has also massively increased the profitability of VMware. In Aug. 2023, just before the acquisition, VMware had an adjusted operating margin of just under 29%. At the end of 2024, Broadcom’s Chief Executive Officer (CEO) Hock Tan said this figure hit 70%.
Clearly, VMware has recently been a massive win for Broadcom. However, the changes Broadcom has implemented have left many customers incensed. The firm may be playing with fire long-term.
The analysis below will detail Broadcom's changes to VMware to drive its success. It will also highlight the risks that Broadcom is taking on. Overall, Broadcom’s VMware strategy can continue adding significant value for the foreseeable future.
Customers are Fighting Mad with Broadcom’s VMware Changes
Broadcom has made changes to VMware that are vast. It has cut the number of VMware employees approximately in half. It has also lowered the number of different packages offered from 8,000 to just four. However, the most impactful move has likely been the effort to switch customers to a subscription license rather than a perpetual one.
This has caused many customers to see the price of their VMware service skyrocket. Price increases of 150% to 300% are on the lower end of the spectrum.
Understandably, many are very unhappy with these changes. The fact that AT&T (NYSE: T) sued Broadcom in 2024 highlights this. It alleged that Broadcom didn’t honor the contract AT&T had with VMware prior to the acquisition. AT&T also said Broadcom quoted it a price increase of 1,050%.
The companies have settled the lawsuit, but it epitomizes the sentiment of many customers regarding the VMware changes. Overall, this has resulted in many customers considering leaving VMware. One report suggests that nearly 52% of customers are mulling a breakup.
The VMware changes have added great value to Broadcom. However, investors cannot ignore the real risk of losing many customers. However, considering leaving and actually doing so are two very different things. Evidence suggests that Broadcom might not be overplaying its hand, although customers are unhappy.
VMware’s Stickiness Means Leaving Could Cause More Pain Than Benefit
Broadcom’s ability to push these huge price increases comes from VMware’s dominance and the huge drawbacks of switching to another provider. Scott Bickley of Info-Tech Research Group suggests that at least 80% of enterprises use some form of VMware.
This ubiquitous adoption creates a large ecosystem of skilled talent and partners that know VMware well. This reinforces its usage and makes it difficult to switch to alternatives. Bickley explains that VMware creates a “super-glue-style lock-in.” To switch from VMware, companies need to rework their whole tech environment. He also notes that VMware alternatives lack the same level of functionality.
A study from Gartner looked at how long it would take to perform a VMware migration. It estimated a period of 18 to 48 months for a large enterprise to do so. Not only would this take a massive amount of time, but there could also be disruptions in operations while making the change.
Overall, Gartner estimates that a migration from VMware could cost a large enterprise more than $6 million. This doesn’t sound like a massive sum to a large company. However, this figure doesn’t include the fact that a company must continue paying Broadcom while it does its migration.
It could take a significant amount of time before overall costs start to come down. A.J. Thompson of the IT consultancy firm Northdoor says that he has seen few companies that are willing to take on the pain of migrating from VMware.
Broadcom’s VMware Strategy Can Continue to Add Value
Overall, although customers are not pleased with Broadcom, it seems that the company understands its power. At this point, Broadcom’s VMware strategy seems likely to continue benefiting the stock for years to come. This is further bolstered by the sheer amount of time it would take for customers to leave VMware.
If Broadcom noticed a sea of customers attempting to leave, it could likely adjust its strategy in time to stave this off.
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The article "Broadcom's VMware Deal Lifts AVGO Despite Complaints " first appeared on MarketBeat.
