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First impressions can be misleading. Case in point: when Broadcom first announced its plan to acquire VMware, initial concerns from regulators focused on perceived anti-competitive effects resulting from the deal.

Others suggested that VMwares value proposition could be diluted. Fortunately, since then, Broadcom has been making its strategic case with regulators and customers. Most notably, Broadcom president and CEO Hock Tan, in a blog post, outlined how a combined Broadcom and VMware will create new competitive pressure on the public cloud by accelerating private and multi-cloud capabilities for enterprises, while pledging $2bn a year for research and development (R&D) and improved VMware deployments.

So, were regulators initial concerns about the deal justified? This article outlines why ABI Research believes this acquisition is a positive development for the market overall and, in fact, essential in the current cloud market.

Virtualisation companies like VMware create vendor-agnostic software that can operate on any server. VMwares products started with virtual machines and hypervisors. Today, its product offerings also include Kubernetes clusters (Tanzu), container-as-a-service (CaaS) products, and software that can automate and orchestrate private, public, and hybrid clouds. So, why has VMware not become a standard in the cloud market for large businesses and small and medium enterprises (SMEs)?

VMwares virtual machines and hypervisors were typically deployed by enterprises and SMEs to maximise workload productivity in their own datacentres. As hyperscalers public clouds became competitive with on-premises datacentres, enterprises and SMEs moved their workloads away from on-premises servers and into the public cloud.

VMware has responded by developing private and multi-cloud products, but sales and adoption of these products are more complicated due in part to the difficulty of deployment, orchestrating, and automating between different cloud domains. Moreover, VMwares ability to create alternatives to the public cloud and democratise multi-cloud deployments is challenging for many reasons.

VMware has a smaller R&D team relative to the hyperscalers, meaning that future market expansions will require significant spending. VMware may not be able to afford this. To meet the demands of multi-cloud environments, VMware would greatly benefit from a strategic partnership with a robust entity that has access to ample financial resources and advanced technical capabilities.

Broadcom could play the role of a strong strategic partner, helping VMware to meet its multi-cloud challenges and ambitions

If VMware is to grow its multi-cloud footprint and position itself as a disruptive alternative, it is crucial to ensure a seamless transition when customers move workloads. VMware will benefit from Broadcoms investment in improving the ease of moving workloads.

Broadcom could play the role of a strong strategic partner, helping VMware to meet its multi-cloud challenges and ambitions. The company has a track record of bringing disruptive technologies to market and helping enterprises better position those technologies to achieve their business outcomes.

VMwares market capitalisation is nearly $60bn as of mid-2023, but this is dwarfed by public cloud heavyweights like Microsoft, for example, which has a market worth of $2.5tn and the ability to invest significantly in gaining and securing cloud market share.

Broadcoms strategic vision for VMware, and its commitment to invest in it, are essential if VMware is to evolve its market position and create viable alternatives to the public cloud. But why are regulators concerned?

Both the European Commission and the UKs Competition and Markets Authority (CMA) launched formal inquiries about the acquisition, citing concerns that Broadcom can use VMwares position in the virtualisation market to gain unfair advantages in discrete hardware products that interact with VMware software, such as network interface cards (NICs), storage adapters, and fibre channel host bus adapters.

ABI Research believes there are three main reasons why concerns about interoperability are misplaced in relation to Broadcoms acquisition of VMware:

First, Broadcoms business model has long been based around hardware and software products that are designed to function with no bias to any one vendor. Broadcoms products are integrated into hundreds of vendor products in the market, many of which are also competing with one another. Broadcom provides the infrastructure and chipset solutions to enable these products without bias.

Second, VMwares ubiquity and interoperability are key to Broadcoms broader strategic goals for the combined group. In commercial terms, Broadcom would undermine, if not destroy, the value of its acquisition if it were to risk VMware softwares ubiquity to favour a few niche Broadcom hardware products that are of concern to regulators that is, NICs, storage channels, and fibre channel host bus adapters. As margins for VMwares software are significantly higher than for the hardware products of concern, it simply makes no sense to degrade a more profitable product to attempt to sell less profitable products.

And third, it would not be possible for Broadcom, technically speaking, to target particular hardware competitors, even were such a strategy to become commercially advantageous. Any degradation in VMware softwares interoperability would apply to multiple hardware vendors, across the board, with detrimental commercial consequences.

Ultimately, while different market and product lifecycles would make any effort to interfere with a products interoperability difficult and costly, it is against Broadcoms interests to try and gain an advantage with relatively inexpensive products. Doing so would cause reputational damage and put much larger investments in VMware at risk. Tan has already reiterated that several VMware products are key for the future, including Tanzu and VMwares CaaS layer, which is agnostic to underlying infrastructure and can run in private, public, or multi-cloud environments.

Todays market is not for faint-hearted service providers and is wholly dominated by hyperscalers. Looking at current dynamics, competition between leading public cloud providers is intense and the barriers to entry for new entrants are prohibitive.

Enterprises that have been lured to migrate workloads to the hyperscalers are left with limited options. Many do not have the capabilities to host their own workloads on-premises and are locked into a specific hyperscaler platform and fee structure.

These very same enterprises also report that its difficult to decouple their products from hyperscaler platforms without incurring costs, and in almost all cases, its not possible to port between hyperscaler platforms, again without incurring costs and refactoring efforts for example, migrating from AWS to Google Cloud to reduce costs. These issues of cost and lock-in for customers, as well as lock-out for potential competitors, are central to a broader set of concerns that have prompted inquiries and investigations by regulators in the US, the EU, and the UK.

Broadcoms vision in acquiring VMware is to create products that allow enterprises to freely move their application payloads between private, public, and hybrid cloud environments. Right now, this is not possible without cost and effort. Broadcom aims to address the technological and cost gaps. Application portability is a challenge for enterprises using the public cloud, but VMware alone may not have the resources to develop a world-class solution. With Broadcoms experience and R&D investments, VMware will have a much stronger opportunity to compete and succeed in this market.

Hyperscalers, concentrated principally in the US and China, are not slowing down and hundreds, if not thousands of enterprises are making their application hosting choices right now. With a stronger VMware value proposition enabled by Broadcom investments, businesses could overcome the barrier of hyperscalers lock-in, gaining more flexibility to host their applications across multiple cloud environments according to their business needs.

Based on Broadcoms stated intentions, regulators should welcome its acquisition of VMware. The transaction will, in all likelihood, lead to a stronger VMware, and a healthier multi-cloud ecosystem.

Dimitris Mavrakis, senior research director, manages ABI Researchs telco network coverage, including telco cloud platforms, digital transformation, and mobile network infrastructure. Research topics include artificial intelligence (AI) and machine learning (ML) technologies, telco software and applications, network operating systems, software-defined networking (SDN), network functions virtualisation (NFV), long-term evolution (LTE) diversity, and 5G. ABI Research is a global technology intelligence firm delivering actionable research and strategic guidance to technology leaders, innovators, and decision makers around the world.

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