On May 26, SPEKA wrote that the American semiconductor manufacturer Broadcom will buy VMware for $ 61 billion. This is one of the largest deals in the history of the technology industry. At the request of SPEKA, Artem Kokhanevich, Director of GigaCloud Cloud Solutions Operator, wrote a column on what this agreement means for the market and why Broadcom is ready to pay such crazy money for VMware.
Last week, Broadcom announced it was buying VMware, the world’s largest virtualization software developer. Both companies are absolute leaders in their niches. Both are stuffed with technology and patents. Both are real technology market sharks, which over the decades of their existence have managed to absorb many promising startups and mature companies, successfully integrating some into their product portfolio and burying some along the way.
The agreement between Broadcom and VMware is one of the most expensive in history. Broadcom will pay $ 61 billion for a company with an annual turnover of about $ 12 billion. This is a very high multiplier. The market reacted favorably to the announcement of the deal: on May 20 at the close of trading VMware shares were worth $ 95, and after the announcement of the deal, they jumped to $ 130 apiece. Broadcom shares initially asked for something (this is to be expected, because such high costs are always questionable at first), but have almost recovered. But this is only the beginning of the story.
VMware earns 71% of its revenue under the traditional licensing model (pay once and use for life). The regular payment model, once imposed on cloud operators using VMware solutions, is only 29%. But Broadcom has already said it plans to abandon traditional perpetual licenses in two years and move to regular payments.
It is likely that the company will lose some customers, but in the long run this will lead to significant revenue growth. And guaranteed and recurrent. The second effect is to change the market. Smaller competitors will follow the example of the market leader, and customers will have fewer and fewer opportunities to avoid switching to a rental model. In turn, this will have the following effect – customers will have to learn to calculate the Total Cost of Ownership (now many do not), and then it turns out that the clouds – it’s really cheaper.
It is likely that we will even see some reduction in the cost of licenses that we as a cloud provider will be able to broadcast to our customers.