OK, Broadcom is buying VMware, and most of the comments I’ve seen from industry analysts or the Street have been, well, doubtful. I guess that makes it fair play that I have doubts about their doubts. There are potential issues raised by the deal, but they’re not spectacularly different from the issues raised by any large M&A. There are also potential signals of a shift in the industry that could be very important indeed. I’ll start with the issues and move on to the signals.
The first issue is the classic “channel competition”. Broadcom is primarily a hardware company, and its products are used in a lot of devices that also run higher-level software. VMware, as a major supplier of higher-level software, will surely compete with some of the stuff current Broadcom customers offer. Some might see that competition as a reason to seek an alternate chip supplier. I don’t see this as a big deal; Broadcom has offered cards and devices as well as chips, so there’s always been a bit of an overlap between levels of their products and offerings of others that are based in part on Broadcom elements. In networking, recall that they bought Brocade earlier, so there’s also been a bit of overlap in the networking space.
One way Broadcom could address this issue is to visibly embrace standard architectures. The P4 standard for switching chips is an example; Broadcom has its own model, but P4 is backed by the ONF and others. An open link between lower-level hardware components and the software, including VMware’s stuff, would help ease any concerns software firms might have in supporting the hardware elements in software that’s competitive with VMware.
The second issue is the potential dilution of management attention, which some industry and financial analysts see as a risk to VMware customers. This is a harder issue to dismiss because it’s based on something very subtle, but it’s hard for me to understand why Broadcom would make its largest-ever acquisition and then poison the customer base of the company they bought.
Moving on to signals now, the most obvious is that the deal suggests a shift toward a single-source play for a complete product, breaking away from a tendency for the industry to separate IT hardware and IT software in terms of suppliers. Broadcom could, in theory, offer a package of technology that would be mutually supporting, and that could work against competitors who offer only piece parts. This issue is particularly important because VMware is strong in the data center and hopes to be strong in networking, and Broadcom has hardware components/chips in both these spaces.
Why, you could rightfully ask, is single-source plays for all the elements of an IT device important? Most enterprise buyers could answer that one for you. It’s been increasingly difficult for enterprises to hire and retain highly qualified technology teams, because most such people think their prospects are brighter working for a vendor. Every year, things like virtualization and white-box networking come along and make it more challenging to stay ahead of critical tech developments. The users find it harder to integrate the pieces of technology needed to deploy a unified IT or network device, so they want to lean on vendors. Vendors are happy to prop things up, as long as it doesn’t hurt their own bottom line. The more skin they have in the game, the more likely they actually have all the pieces needed themselves, the more likely it is that they’ll be willing to do the requisite propping.
Networking, even the network interface to servers, is already heavily dependent on custom silicon and network adapter cards. It’s also obviously dependent on software, and so it’s a place where creating a total solution could save users headaches and at the same time create better margins for the vendor who creates that total solution.
Differentiation, or lack of it, also enters in here. You can justify higher prices and margins if you offer something others don’t have. If there is no “something” that’s a recognized differentiator, then price is what matters. The more technology elements you can provide to build a usable unit of deployed IT or networking, the more likely you can hold off competitors where differentiation is difficult, because your own margins are strong.
All of this is a sort-of-selfish justification for the deal, I admit, but there’s also a broader industry signal that may be in play here. When a network or IT device is assembled from the hardware and software pieces provided by multiple players, there is a real risk that the sum of the business goals of all the players don’t lead to an optimum-from-the-user-perspective solution. Software vendors want to sell their software, and hardware vendors have a likewise-self-interested vision of the market. Could a company who sold both, drove development in both spaces, find it easier to create an optimum hardware/software partnership? I wonder.
Virtualization, the cloud, the edge, white-box networking, 5G, and even things like AI are all dependent on a highly symbiotic hardware/software relationship. The question is whether a vendor like the newly combined Broadcom/VMware could create that symbiosis better and quicker than a competitive market for the pieces of the solution. Competition doesn’t necessarily generate innovation, and that’s especially true when the competitors are bent on protecting their current market incumbencies.
Custom chips are increasingly the foundation of innovation, certainly for hardware and even credibly for devices overall. Can we envision realistic white boxes or AI without them? One of the most successful of all chip companies, Nvidia, has both chip drivers and additional software offerings. I think you can make a case for the same strategy in networking and IT, which means that the Broadcom acquisition of VMware could be good for innovation.
A final point is that vendors like Cisco and Juniper have developed custom silicon, entered into alliances on silicon and silicon photonics (Juniper, in particular), and so forth. That makes the Broadcom/VMware decision look like less of an outlier, and in fact raises the question of whether Broadcom and VMware, separately, could be competitive in the kind of market that this sudden chip interest says is now developing.
The value of the deal may tie back to some of the points I made yesterday on Cisco’s quarter. Differentiation in networking is becoming more difficult, so the space is threatened with price commoditization. When that happens, it’s not uncommon to try to combine a product area with one whose value and pricing power are higher. In other words, the earlier point I made on the ecosystemic value of the deal may be its best justification. If the other potential values are also realized, then the deal could be very good indeed.