How Broadcom’s acquisition of VMware will accelerate multi-cloud adoption

VMware’s 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.

Broadcom’s 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 UK’s Competition and Markets Authority (CMA) launched formal inquiries about the acquisition, citing concerns that Broadcom can use VMware’s 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 Broadcom’s acquisition of VMware:

First, Broadcom’s business model has long been based around hardware and software products that are designed to function with no bias to any one vendor. Broadcom’s 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, VMware’s ubiquity and interoperability are key to Broadcom’s 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 software’s 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 VMware’s 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 software’s 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 product’s interoperability difficult and costly, it is against Broadcom’s 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 VMware’s CaaS layer, which is agnostic to underlying infrastructure and can run in private, public, or multi-cloud environments.