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VMware Customers Cautious after Recent Broadcom Actions

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Broadcom, under the leadership of CEO Hock E. Tan, recently closed its $69B acquisition of VMware. Post-acquisition, Broadcom is moving quickly in undertaking several critical initiatives with VMware that, while likely beneficial to Broadcom shareholders over the long term, are causing uncertainty among many VMware customers.

Transition to Subscription Model

One of Broadcom’s primary strategies to drive revenue growth is shifting VMware's business model from a perpetual license to a subscription-based one. This change aims to provide more predictable and stable revenue streams and aligns with the broader industry trend towards subscription services.

The move, as described by Tom Krause, president of the Broadcom Software Group, during the company’s most recent earnings call, is central to Broadcom’s plan to boost VMware’s contribution to its pro forma EBITDA to approximately $8.5 billion within three years, a considerable increase from VMware’s current production of about $4.7 billion. The emphasis on subscriptions is a key component of this ambitious growth target.

Broadcom's move to subscription models could lead to slower short-term growth for VMware and necessitate restructuring contracts from perpetual to subscription. VMware's strategy includes a trajectory of accelerated growth. The move to higher-value software stacks and subscription sales is expected to drive revenue growth over the next three years.

This transition could also affect VMware's customer relationships, as customers may push back against the shift to subscriptions, which are generally perceived as more expensive than perpetual licenses. VMware's expansion beyond infrastructure management with products like Tanzu could face hurdles if customers pause or reconsider their investments amid these changes.

Selling off Desktop & Carbon Black

During its earnings call, the company revealed plans to divest VMware's end-user computing portfolio and its Carbon Black security software unit. This strategic move aligns with Broadcom's stated intent to concentrate VMware's resources and efforts on creating global private and hybrid cloud environments tailored for large enterprises.

The end-user computing portfolio, encompassing desktop virtualization, application publishing, and mobile device management, alongside Carbon Black, a security software unit, are identified as non-core assets and are set to be separated from VMware's main business.

Broadcom expressed a commitment to finding suitable buyers for these units, ensuring they find "good homes," considering that many of their customers overlap with those of VMware's core products. This decision reflects Broadcom's broader strategy to refine VMware's product offerings and focus on areas that align with its vision of developing high-value cloud infrastructure solutions for global enterprises.

The company said that the moves are essential to redirect VMware's efforts towards its primary business of creating private and hybrid cloud environments, which is crucial for large enterprise customers worldwide.

Layoffs

Just days after it closed its acquisition, news emerged that Broadcom is set to lay off at least 2,837 VMware employees. This includes a substantial number at its Palo Alto campus in California, accounting for 1,267 employees, and 577 at its Austin facility.

It's important to note that the actual number of layoffs could exceed these figures since not all layoffs must be reported through WARN notices. The total workforce of VMware globally is around 38,300 employees.

The layoffs are officially attributed to "economic" reasons, although Broadcom has not provided further specifics or justifications. Despite these layoffs, VMware remains a central piece in Broadcom's strategy for its enterprise software segment.

Analyst’s Take

You can look at a company from the perspective of the customer or the stockholder. I’m not a financial analyst, so I’m going to interpret Broadcom’s actions with a view of how those actions might impact an IT organization; after all, the IT practitioner is most directly impacted.

Broadcom's acquisition of VMware represents a strategic pivot that underscores the semiconductor giant's intensified focus on enterprise software. Transitioning VMware towards subscription models is a savvy move that aligns with broader market trends. But this shift may test customer loyalty, as subscription models often imply higher costs over time than perpetual licenses.

The decision to divest VMware's end-user computing and Carbon Black units clearly indicates that Broadcom seeks to sharpen VMware's focus on its core competencies in cloud environments. Such divestitures could streamline operations while also raising questions about future innovation and support for VMware's broader product suite.

Layoffs following the acquisition, while delivering operational cost savings, may have a broader impact on VMware’s innovation trajectory and customer service capabilities. This reduction in force, ostensibly for economic reasons, could introduce risks related to execution and market perception.

Predicting how Broadcom's moves will impact VMware products and services over the long term is impossible. The swiftness with which Broadcom instituted layoffs and product divestitures raises questions about how it will guide VMware forward.

As in any period of uncertainty involving technologies fundamental to critical IT infrastructure, IT organizations are well-advised to comprehensively analyze the risks involved before committing to any significant VMware deployment or renewing long-term license agreements. IT buyers should look to mitigate risks with a dual-vendor approach where feasible.

Many VMware customers are already adopting alternative solutions. Nutanix, VMware’s closest competitor, revealed record growth in its most recent earnings. While much of Nutanix’s growth was driven by its own strategic initiatives, CEO Rajiv Ramaswami acknowledged that the company did “close some additional deals” explicitly because of uncertainty about how the acquisition will unfold.

With the industry watching, Broadcom's stewardship of VMware in the coming fiscal year will be a critical test of its strategic vision for enterprise software dominance. While Broadcom is clearly focused on getting the financial aspects of the acquisition quickly under control, how the company will deliver long-term value to its VMware customers will become clearer.

Until there's clarity, however, IT organizations should continue to act with caution. Mitigating risk, after all, is the number one job for enterprise IT.

Disclosure: Steve McDowell is an industry analyst, and NAND Research an industry analyst firm, that engages in, or has engaged in, research, analysis, and advisory services with many technology companies, which may include those mentioned in this article. Mr. McDowell does not hold any equity positions with any company mentioned in this article.


VMware Tanzu: 5 New Incentives Partners Need To Know

From VMware tripling up-front margins to tens of thousands of dollars in new presales and post-sales rewards, CRN breaks down five new channel partner incentives for VMware Tanzu.

VMware Launches New Tanzu Channel Partner Incentives

VMware is incentivizing channel partners to drive application modernization and Kubernetes sales with Tanzu more than ever before with the launch of several new incentives, including 30 percent margins on new customer opportunities and tens of thousands of dollars in presales and post-sales rewards.

“VMware is looking to deliver the most compelling business opportunity for partners to invest in their modern applications practice in the industry,” said Richard Steeves, senior director of worldwide partner modern application platform sales, who leads VMware’s partner go-to-market for Tanzu, in an interview with CRN.

Steeves said VMware is looking to take channel partner profitability to a new level for selling Tanzu, the company’s innovative Kubernetes portfolio.

“We’re putting the dollars where their strategic intent is. It’s part of that ongoing commitment around their partner-first culture,” he said. “In the modern application space, they are going to win together and we’re going to create profitable partner business relationships for partners to be able to build and grow practices together with VMware.”

VMware Tanzu is a suite of products and services that helps customers run and manage Kubernetes clusters across public and private clouds. Tanzu enables customers to automate the security and delivery of containerized workloads, manage applications in production, better adopt a hybrid cloud environment, and free applications from infrastructure to help developers build modern apps.

Application modernization is becoming a top business priority for many businesses across the globe. According to VMware’s 2021 Market Insights Report, 91 percent of executives say their primary application initiative is to migrate and modernize legacy apps. By 2024, over half of all applications are expected to be modern applications, VMware’s report found.

VMware is investing in channel partners to capture the market opportunity for application modernization with Tanzu by increasing profitability, enabling Tanzu practice development and better supporting co-selling engagements.

CRN breaks down VMware’s five new incentives and initiatives for Tanzu that every channel partner needs to know about.

30 Percent Up-Front Margins For New Tanzu Customers Opportunities

VMware has tripled the up-front margin opportunity for partners bringing in new customer opportunities to Tanzu, from 10 percent margins to 30 percent margins.

“As partners bring pipeline and register new deals and opportunities, we’re going from up to 10 percent to now up to 30 percent across the Tanzu portfolio,” said Steeves.

Channel partners can receive the 30 percent up-front incentive via VMware’s Advantage+ deal registration program when bringing in new Tanzu customers.

“It’s a significant investment in recognizing the role that their partners are playing in, quite frankly, leading this in the industry and helping to accelerate the adoption of Kubernetes and application services and modernization capabilities across the industry,” said Steeves.

$25,000 Tanzu Proof-Of-Concept Rewards

Through its Customer Lifecycle Incentives program for Tanzu, VMware is now offering an up to $25,000 reward for partners who conduct proofs of concept.

Bob Keblusek, chief innovation and technology officer for Sentinel Technologies, a top VMware channel partner, said the $25,000 reward for driving proofs of concept around Tanzu is a huge win for the channel.

“Not every proof of concept is going to result in a sale, obviously. So sometimes you go through the cycles, you ship product, you put it in, you get it working, you let the customer see the value, and they still don’t buy it,” said Keblusek. “So rewarding that activity, for both the wins and losses on doing the POCs, makes a lot of sense. It increases the win rate for the manufacturer, while at the same time compensating us to put in the time for those cycles. It’s a great move by VMware.”

$20,000 For Tanzu Solution Deployments, $15,000 For Technical Assessments

VMware’s Customer Lifecycle Incentives program for Tanzu is also offering rewards for partners who provide customer technical exams and Tanzu solution deployments.

Partners who conduct Tanzu solution deployments can earn up to $20,000.

For Tanzu customer technical exams, partners can generate up to $15,000 for each opportunity.

VMware’s Steeves said it’s important to know that many Tanzu opportunities start small but can quickly scale to millions of dollars.

“Most of their opportunities in the Tanzu portfolio, they can start small—really helping a customer to accelerate the adoption and standing up their Kubernetes environments,” said Steeves. “So $50,000 to $150,000 deals are quickly turning into million-dollar opportunities from a recurring revenue standpoint, as they’re taking advantage of expanding in the account and funding those activities through the incentives that we’re rewarding.”

Joint Co-Selling; Same Invoice For Partners Selling Tanzu Alongside ISVs

VMware offers a co-sell program between VMware Tanzu and ISVs focused on application modernization. Customers can now buy ISV solutions alongside Tanzu solutions on the same invoice from a partner, which simplifies procurement.

To facilitate co-selling engagement with VMware sales, deals with partners will automatically become eligible for joint pursuit planning via the Partner Value Registration program.

“Regardless of how the customer is choosing to enjoy the benefits of the portfolio, regardless of the route to market—we’re looking to light up and enable those ecosystems,” said Steeves.

“What’s also compelling about the Tanzu portfolio is that it doesn’t matter which runtime environment or where the Kubernetes is sitting— it could be Kubernetes sitting on vSphere in a private cloud environment, it could be on [Amazon] EKS in the public cloud environment, it could be on one of the more than 4,500 cloud-certified partners that they have in the VMware ecosystem today, or it could be in the telco in the edge—we’re meeting customers where they are in their journey,” he said. “We’re trying to help accelerate that opportunity for partners.”

New Learning Subscriptions

VMware is launching new Learning Subscriptions for platform operators and application developers to help reduce costs and time commitment toward developing Tanzu technical expertise. The new subscriptions will be available to partners in April and include prerequisite courses aligned to VMware partner competencies and certifications for Tanzu and Spring.

By offering courses via a flexible, on-demand learning platform and eliminating the need for travel, partners can train consultants more quickly and reduce time to revenue while developing a Tanzu practice.

“What we’ve done is simply follow the needs for their partners to have more outcome-oriented, use case-based enablement to help accelerate their application modernization skills and capabilities,” said Steeves. “It’s helping to modernize how they engage with their partners around their acquisition skill and capability overall. It’s a really compelling suite of learning services and offers.”


VMware Introduces Frameworks And Services At Explore Conference To Enable Enterprise Adoption Of Generative AI

AI in various forms has existed for decades, but the subset of generative AI (GAI)—spearheaded recently by ChatGPT—has propelled AI into the public view like never before. Consequently, I would wager that by this point just about every CEO and board of directors has asked, "What is their generative AI story?"

Since so many companies use VMware, VMware has likely heard many customer requests to hear its GAI story and capabilities, too. At VMware Explore 2023 last week, they received the first chapter of that story, which is what I’ll unpack in this article. I was on the ground in Las Vegas and talked to company executives about the capabilities.

Details on AI from VMware Explore 2023

Moor Insights & Strategy

Generative AI poses challenges for enterprises

Before they get to VMware’s specific angle on GAI, let’s think about the broader challenges in its deployment. While generative AI can transform business by generating content, designs and creative outputs, there are multiple potential pitfalls in using public large language models (LLMs) to build GAI applications.

The large datasets that GAI uses to learn and generate outputs may require special efforts to ensure compliance with data protection regulations. For example, if a healthcare organization wants to use generative AI to predict patient outcomes based on medical records, HIPAA regulations would require scrubbing patient identities out of the dataset before training the model.

Generative AI models are only as good as the data feeds them. If the training data contains biases, those biases will show up in the results. Suppose a lender uses generative AI to analyze loan applications based on training data that includes historical lending decisions that were racially biased. In that case, the new output would perpetuate the historical biases. Even setting aside concerns about bias, using uncertain training sources can make understanding how the model arrives at specific conclusions difficult, which can be problematic when transparency and accountability are critical.

Some enterprises can take a hybrid approach, leveraging public LLMs and layering on smaller models or using other techniques to incorporate an organization's proprietary data and targeted use cases. But, for most enterprises, the low-risk option is to develop LLMs based only on internal data.

A single stack to run generative AI applications

VMware AI Labs developed VMware Private AI specifically to provide a prescriptive way for enterprises to build LLMs and GAI applications internally. VMware Private AI Foundation with Nvidia includes the software to customize LLMs and run GAI applications, such as chatbots, virtual assistants and content search and summarization—and, of course, it is tied to Nvidia hardware and software. The single-stack solution provides enterprises with the software and compute capacity to fine-tune LLM models and run generative AI applications using proprietary data in VMware's hybrid cloud infrastructure.

The Private AI Foundation architecture is built on VMware Cloud Foundation, an integrated software stack bundling NSX for networking, vSphere for computing and vSAN for storage. VMware Cloud Foundation is a hybrid cloud platform that supports native Kubernetes workloads and management in addition to VM-based workloads.

The stack includes Nvidia AI Enterprise, a software suite of AI tools, frameworks and pre-trained models that helps enterprises develop and deploy AI workloads. The suite includes the Nvidia NeMo framework for building, customizing and deploying generative AI models. NeMo combines customization frameworks, guardrail toolkits, data curation tools and pre-trained models to enable enterprises to adopt generative AI.

The stack will also include new software from both companies. Nvidia AI Workbench is a unified tool that enables the creation, testing and deployment of AI models in GPU-powered workstations, data centers and the cloud. VMware has also promised new software to help in AI projects, including a vector database and deep learning virtual machines.

VMware and Nvidia are working with server manufacturers Dell Technologies, Hewlett Packard (HPE) and Lenovo to build validated reference architectures that have VMware Private AI Foundation with Nvidia built in. The server configurations will include the new Nvidia L40S GPU, which Nvidia claims has 1.2 times more generative AI inference performance and 1.7 times more training performance when compared with the Nvidia A100 Tensor Core GPU.

Supporting best-in-class open-source software (OSS) technologies

Enterprise customers that want to build and feed data to open-source software running VMware Cloud Foundation can utilize the VMware Private AI Reference Architecture for Open Source. VMware has collaborated with several partners to provide validated reference architectures for building and serving OSS models on top of VMware Cloud.

VMware is publishing a reference architecture with code samples for SafeCoder from Hugging Face, a tools developer for machine learning applications. SafeCoder enables customers to build LLMs, fine-tuned on a proprietary codebase, using state-of-the-art open models and libraries without sharing code with Hugging Face or any other third party.

The VMware reference architectures will also include Anyscale, which uses the widely adopted open-source Ray unified compute framework. Ray can be used on the VMware Cloud Foundation to scale AI and Python workloads.

In a parallel development, VMware, Domino Data Lab and Nvidia have also partnered to deliver a unified analytics, data science and infrastructure platform that is optimized, validated, supported and purpose-built for AI/ML deployments in the financial services industry.

Wrapping up

By this point, I have sat in hundreds of generative AI briefings and attended 25 events, but I have to give VMware credit for clearly articulating the value of generative AI for the enterprise. Many moving parts still need to come together, making me skeptical about the company's somewhat vague "early 2024" launch date.

While VMware Private AI Foundation with Nvidia will be available as a single-SKU product from VMware, the underlying infrastructure and software stack are complex. I predict that most customers will wait for the more compelling supported pre-integrated systems from Dell, HPE and Lenovo. Depending on when VMware started working with the server vendors, the availability could be a schedule risk. I also wonder if the traditional hardware OEMs can get enough Nvidia silicon to roll out these capabilities, even if it is “early 2024.”

While VMware had to start with Nvidia for its more turnkey AI Foundation, companies can use the reference architecture for both Intel and AMD. As the market wants choice, I am hopeful they will see an AI Foundation for Intel, AMD and maybe even Qualcomm.

I expect the first VMware Private AI users will be existing VMware customers. That said, there is a choice of competing offerings from cloud providers AWS, Microsoft Azure and Google Cloud, each of which has generative AI enterprise systems publicly available today. I have also written about IBM’s full-stack generative AI offering, Red Hat OpenShift AI, a direct competitor to VMware's offering. Red Hat with IBM is already GA on many generative AI capabilities, and I will be interested in assessing that horse race. With enterprises everywhere champing at the bit to integrate generative AI into the business, choice and competition is always a good thing.


 


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