Broadcom's stated strategy ignores most VMware customers
- Reference: 1653915608
- News link: https://www.theregister.co.uk/2022/05/30/broadcom_strategy_vmware_customer_impact/
- Source link:
The Register offers that summary based on Broadcom's own words, as uttered at a November 2021 [1]Investor Day .
The Broadcom event kicked off with an overview from president Tom Krause, who illustrated the outfit's go-to-market plan with the following diagram.
[2]
Broadcom's go-to-market plan
Click to enlarge
Krause told investors that the company actively pursues 600 customers – the top three tiers of the pyramid above – because they are often in highly regulated industries, therefore risk-averse, and unlikely to change suppliers. Broadcom's targets have "a lot of heterogeneity and complexity" in their IT departments. That means IT budgets are high and increasing quickly.
Such organisations do use public clouds, he said, but can't go all-in on cloud and therefore operate hybrid clouds. Krause predicted they will do so "for a long time to come."
[3]
"We are totally focused on the priorities of these 600 strategic accounts," Krause said.
[4]
[5]
Evidence of that focus came on another slide that revealed Broadcom's two previous major software acquisitions – CA and Symantec – each spent around 17 percent of revenue on research and development before they were bought.
Broadcom has trimmed that to 14 per cent by focusing R&D on the needs of its top 600 customers. Krause said savings come from not addressing the needs of smaller customers.
[6]
Focusing on customers who aren't likely to leave means Broadcom slashes its sales and marketing costs. Krause said CA and Symantec spent 29 percent of revenue on sales and marketing. Broadcom spends 7 percent.
Which brings us to the "Enterprise" segment on Krause's pyramid. Broadcom aims to "sustain" those 600 customers.
The next tier down on the pyramid is "Commercial." Krause said Broadcom is content to have those 100,000 customers "trail" over time.
[7]
Krause also outlined Broadcom's ambition to stop selling perpetual licenses and sell more, and longer, subscriptions. Doing so creates what he called "quality revenue" that's better than the revenue from maintenance deals.
A little hope for VMware customers, maybe less for the sales team
A reminder: Broadcom has said it expects VMware to contribute $8.5 billion to EBITDA within three years of the acquisition deal closing, a substantial jump from VMware's current $4.7 billion. If Broadcom uses the strategies it outlined last November once VMware has been acquired, it's not hard to see many millions of sales expenses going away.
And VMware has fat to trim, on Broadcom's metrics, as in its most recently reported quarter it spent $1.053 billion on sales and marketing to win $3.088 billion of revenue – more than 34 percent of revenue. If Broadcom can reduce VMware's sales and marketing spend to 7 percent, it will drop to $216 million a quarter and that EBITDA ambition will have been all but achieved without R&D cuts.
[8]Broadcom to 'focus on rapid transition to subscriptions' for VMware
[9]Cheers ransomware hits VMware ESXi systems
[10]Confirmed: Broadcom, VMware agree to $61b merger
[11]Broadcom buying VMware could create an edge infrastructure and IoT empire
Broadcom increased margins at CA and Symantec from EBIT margins of roughly 39 percent to 70 percent, and this included cutting sales and marketing costs from 29 percent of revenue to 7 percent.
"These dynamics are unlikely to make VMware a more aggressive competitor," said financial service group Jefferies today.
VMware probably needs a higher sales spend to launch new products, especially the Tanzu portfolio. But last November's Broadcom Software strategy presentation remains a very scary document for VMware's sales and marketing team. So might the [12]letter Broadcom Software sent to VMware staff as it mentions the virtualization giant's "world-class team, known for engineering prowess and strong customer and partner relationships."
Krause did mention the strength of VMware's sales organization in his [13]remarks about buying the company but did so in the context of its channel relationships.
That may offer some comfort for VMware customers as Krause and Broadcom CEO Hock Tan both said Broadcom plans to work with VMware's 300,000-plus customer base by using partners.
That perhaps signals that Broadcom will take a different approach to the "Commercial" tier of the pyramid for VMware customers. Most are already served by partners so maybe it will be business as usual.
Your correspondent has often heard VMware say its innovation efforts begin with the needs of its largest customers, then trickle down to smaller users. Again, there's the potential for modest R&D spending cuts not to be felt too keenly by the bulk of VMware customers.
Or maybe those customers are already wondering just how much access to Microsoft's Hyper-V virtualization tools they're allowed under their current Windows Server licenses, and when they should start putting some of those entitlements into production in case vSphere goes south. ®
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[1] https://investors.broadcom.com/events/event-details/broadcom-software-investor-day-2021
[2] https://regmedia.co.uk/2022/05/30/supplied_broadcom_software_go_to_market.jpg
[3] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_software/virtualization&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=2&c=2YpTqHzMaBnq-km9Se3BauAAAAA0&t=ct%3Dns%26unitnum%3D2%26raptor%3Dcondor%26pos%3Dtop%26test%3D0
[4] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_software/virtualization&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=4&c=44YpTqHzMaBnq-km9Se3BauAAAAA0&t=ct%3Dns%26unitnum%3D4%26raptor%3Dfalcon%26pos%3Dmid%26test%3D0
[5] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_software/virtualization&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=3&c=33YpTqHzMaBnq-km9Se3BauAAAAA0&t=ct%3Dns%26unitnum%3D3%26raptor%3Deagle%26pos%3Dmid%26test%3D0
[6] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_software/virtualization&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=4&c=44YpTqHzMaBnq-km9Se3BauAAAAA0&t=ct%3Dns%26unitnum%3D4%26raptor%3Dfalcon%26pos%3Dmid%26test%3D0
[7] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_software/virtualization&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=3&c=33YpTqHzMaBnq-km9Se3BauAAAAA0&t=ct%3Dns%26unitnum%3D3%26raptor%3Deagle%26pos%3Dmid%26test%3D0
[8] https://www.theregister.com/2022/05/27/broadcom_vmware_subscriptions/
[9] https://www.theregister.com/2022/05/26/vmware-cheers-ransomware/
[10] https://www.theregister.com/2022/05/26/broadcom_vmware_merger/
[11] https://www.theregister.com/2022/05/26/broadcom_buying_vmware_makes_sense/
[12] https://ir.vmware.com/websites/vmware/English/5010/us-sec-filing.html?shortDesc=Filing%20of%20certain%20prospectuses%20and%20communications%20in%20connection%20with%20business%20combination%20transactions&format=convpdf&secFilingId=b9ab5fa1-3a6e-477e-94b2-270002b55d26
[13] https://www.theregister.com/2022/05/27/broadcom_vmware_subscriptions/
[14] https://whitepapers.theregister.com/
Re: But it's a winning strategy.
-> It'll win them a terrible reputation in no time at all.
With who? If their top customers are staying with them, those who generate most revenue, it won't matter.
Re: But it's a winning strategy.
You can't piss off the bulk of your customer base & expect it not to have a rather nasty effect on your bottom line. They may not spend as much individually as that top tier, but in total they are the foundation upon which the rest of your house of cards has been constructed. Anger the base, it shifts away to your competition, & that previously stable base you're using to reach for that top strata suddenly crumbles out from beneath you.
Re: But it's a winning strategy.
-> You can't piss off the bulk of your customer base
If the bulk of your customer base are sticklebacks with profits to match, you would be better going after the whales with profits to match.
-> they are the foundation
They are not. They are the sticklebacks, and the chances of them becoming whales one day is next to zero in nearly all cases. I would rather deal with 600 customers than 100,000 if those 600 are the ones that bring in most profit.
Re: But it's a winning strategy.
"If the bulk of your customer base are sticklebacks with profits to match, you would be better going after the whales with profits to match."
The biggest whales feed on krill. Broadcom isn't aiming to be a big whale.
Re: But it's a winning strategy.
"If their top customers are staying with them, those who generate most revenue, it won't matter."
The potential 600 + n customers who get as big as their top 600 will be going elsewhere.
I'm sure there will be investment managers doing the same as you - nodding and saying "Good idea. Cut costs." After a few quarters they'll be saying "Why is your customer base shrinking?".
Re: But it's a winning strategy.
-> After a few quarters they'll be saying "Why is your customer base shrinking?".
You are mistaken. They will not be asking this if the profits are rising. Customer numbers are in general not important. Revenue (or rather profit) per customer is.
Re: But it's a winning strategy.
Why would the profits be rising? OK, they make a one off cut of costs. Profits rise as a corresponding one-off. Then they don't. They've defined their market and are limiting any revenue increases to what that market wants to buy.
I suppose from top management's PoV it's Phase 1 of what will be a good strategy if they can pull it off. Phase 2, of course, is to become heroes a second time around by breaking out of the corner they deliberately painted themselves into with Phase 1.
Re: But it's a winning strategy.
-> Why would the profits be rising?
From the article: Broadcom's targets have "a lot of heterogeneity and complexity" in their IT departments. That means IT budgets are high and increasing quickly.
I imagine that Broadcom has ideas about where that money will be spent.
Re: But it's a winning strategy.
The IT departments might also have ideas and those might not align in the long term.
From an investment PoV I can see the attraction of a business that simply turns in regular income without too much fuss - I'm a pensioner after all. But for a reliable income I'd want that business to be able to be reliable in the long term and in a tech environment the risk of losing place must be considerable.
They're going to cut down on R&D. What good news to competitors. Not only do they now have a chance to leap-frog the market leader they have access to market-leader's ex-staff who might have a few ideas they weren't able to follow up. Some of those ex-staff might be even have been senior staff pissed off at seeing their budgets cut.
Also those 600 customers aren't in a vacuum. There will be other customers. potentially equivalent to those 600 they're ignoring which is a loss of profits in itself. They'll be going to competitors. Then a senior management at one of the 600 leaves and his replacement comes from outside that magic 600. The products he's familiar with are different and they'll be what he gradually moves his department to. Suddenly the business whose products are those you'd never be fired for buying becomes one that's circling the drain. Does it sound familiar?
Re: But it's a winning strategy.
If you lose the small fry, the larger ones slowly leave too.
The whales can't hire anyone who has recent experience in the product. As staff turn over, they find that all their new starters have plenty of experience in %other_product% and none in VMware.
After a while, they switch for new projects. Then they switch everything.
It's a strategy that's highly likely to produce great returns for one or two years, and then kill the company/division over the next decade or two.
Hyper-V isn't a replacement for VMware.
>Or maybe those customers are already wondering just how much access to Microsoft's Hyper-V virtualization tools they're allowed under their current Windows Server licenses, and when they should start putting some of those entitlements into production in case vSphere goes south.
Windows Hyper-V may be "free" but it's overpriced. It's fine to run one or two VM's but just isn't a patch on VMware.
I find it almost impossible to comprehend how MS could have taken a look at what ESXi does let alone what vCenter offers and then come out with Hyper-V and then the horrible, clunky and painful mess that is VMM.
Re: Hyper-V isn't a replacement for VMware.
I have yet to see a "real" hyper-V solution (well, besides Azure I guess) in the real world, setup, working well, and able to have all the features of vSphere.
Hyper-V is regulated to doing a few VMs ontop of your existing server so you can get a little more bang for the bucks out of it.
VMM is a steaming pile. There's so much "if I wanted to, I _could_ use VMM, but I just don't need it". out there. I have yet to see anybody actualy using it, and running away in horror from it.
Without VMware, all I could see is more pushing up into the public cloud, or push into other technologies, the ways VMware is put to use would shrink to almost nothing.
Re: Hyper-V isn't a replacement for VMware.
There's also the risk of sticking more eggs in Microsoft's basket only to be forced onto its cloud when they choose.
I'm mostly starting to look at KVM or XenServer - we don't have a need for all the candy of the vmware system and are already on the esxi free tier as is - so definitely considering that as a long term option. But I know others have different requirements. From toying around with Hyper-V it hasn't really impressed me much at all - though I know customers that run it, but predominantly it's still VMware - though we've had a couple of customers running KVM or Xen in production without any issues.
So, farewell then, VMware Fusion for macOS. Oh, you're still here …
VMware managed to maroon its virtualization package for Macs a year or two back without Broadcom's help: it hived off development (what development?) and support to India, and has failed to catch the Apple silicon bus (you know, the increasingly-wide one). The uninformed can still buy it, but, if you want to run Windows on a Mac, Parallels is the only serious choice. Sad to see competition diminishing — although, if you can live with "community support", Microsoft (Microsoft!) has recently come up with [1]UTM . Must run it up sometime …
[1] https://mac.getutm.app
Re: So, farewell then, VMware Fusion for macOS. Oh, you're still here …
I don't know what you've been doing with VMWare, but if you are using it on an Apple PC as opposed to a server then you may wish to have a look at VirtualBox. I've been using it for a number of years on a Linux PC to run a variety of operating systems for testing purposes with few problems.
I use the GUI to install and configure the VMs. I then use the VBoxManage command line utility to roll back, start up, monitor, and shut down VMs automatically controlled by bash scripts.
You can control pretty much everything about the VM via VBoxManage, As a very simple example if all you want to do is make launching the VM clickable with a mouse then you should be able to do this easily provided you can make a shell script clickable via an icon (this is easy with Linux).
I always thought CA was where software went to stagnate. The fact that Broadcom can "improve" on that is alarming.
But it's a winning strategy.
It'll win them a terrible reputation in no time at all. - Oh, sorry... too late!