Broadcom Software Group — on the brink of being rebranded as VMware — last year under president Tom Krause slashed its research and development budget to better serve the priorities of its top accounts and reduce “delivery to a broad range of businesses.” customers”.
“These companies that we bought were turning about 17 percent (of revenue),” Krause said at Broadcom Software Group’s inaugural investor day on Nov. 9, 2021, regarding the company purchase of CA Technologies and Symantec’s Enterprise Security business. “We are running at 14 percent. The discrepancy there is only around the targeted approach. Our priority is around these 600 strategic accounts. That allows us to focus our R&D resources on their priorities, so we don’t have as much influence on a broad group of customers.”
Broadcom Software was founded in 2021 as a unit within Broadcom and placed under Krause’s leadership. It is made of the combined assets of CA and Symantec’s enterprise security activities.
[Related: ‘Why Aren’t We Staying The Course?’ VMware Takes On Employee Worries]
Krause’s move to reduce R&D to favor large accounts responds to partners’ fears that Broadcom will eliminate support and ignore all of VMware’s top customers if the proposed $61 billion merger between Broadcom and VMware goes through.
San Jose, California-based Broadcom shook the software world last month when it announced its intention to acquire VMware for $61 billion. When completed, Broadcom’s Software Group will rebrand and operate as VMware, incorporating Broadcom’s existing infrastructure and security software solutions.
Broadcom Shut Down All Symantec Customers Except the Top 2000
VMware wouldn’t be the first major purchase Broadcom has made in recent years. In late 2019, Broadcom acquired Symantec’s Enterprise Security business for $10.7 billion.
Richard Steinnon, chief research analyst at IT Harvest, and author of the book “Security Yearbook 2022: A History and Directory of the IT Security Industry” researched Symantec before it was bought by Broadcom.
“They basically cut off all Symantec customers except the best 2000 customers. They said, ‘I’m sorry. We are no longer doing business with you because it is too expensive to support you,” Steinnon told CRN. “I heard that the first time at RSA 2020, so February 2020. Partners came to me and said, ‘We need a replacement for Symantec.’ Resellers in particular were cut off and needed a replacement.”
Steinnon, a former vice president of research at IT research firm Gartner, used those conversations for a Forbes piece he wrote “The Demise of Symantec” in 2020.
While VMware and Broadcom did not respond to requests for comment for this story, Krause published a blog post Wednesday morning stating that the company is investing significantly in R&D and wants to retain VMware’s engineering and support.
“We recognize that customers value VMware for its strong history of innovation and technology leadership … and this will remain a top priority after the deal closes with VMware as part of Broadcom,” he wrote. “A key pillar of the combined company’s innovation roadmap will be to retain and support VMware’s engineering and R&D talent, and we are committed to this effort as we close the transaction and beyond.”
Poll shows that more than half of existing customers have a negative view of the merger
A recent poll conducted by market research firm 451 Group, which surveyed hundreds of VMware customers, found that most of both companies’ existing customers were unhappy with the deal.
About 56 percent of respondents who identified themselves as existing customers of both Broadcom and VMware reported a “negative” impression regarding the deal, with 27 percent citing “very negative” impressions, according to 451 Group.
“The most pronounced sentiment expressed in the survey, addressed to the acquirer, is ‘don’t destroy VMware’,” 451 Group said in the survey results. “Reactions to the deal that emerged in our survey were mostly neutral or negative impressions and were strongest among organizations that self-identify as existing customers of both Broadcom and VMware. This could be due to negative experiences with previous Broadcom software acquisitions (such as CA and Symantec), fueling fears about handling VMware tools deemed important to their business.”
Gartner said it expects Broadcom to spend less on software R&D going forward based on the company’s November presentation, how the company has spent in the past and to meet its profitability targets, analyst Andrew Lerner said.
“We expect Broadcom to adapt R&D to focus on private cloud technologies – specifically NSX, vSAN and vSphere,” Lerner wrote. “Note that Broadcom spends significantly less on software R&D as a percentage of revenue, compared to VMware.”
VMware partner: ‘Our customers have concerns’
Robert Keblusek, chief technology officer of Sentinel Technologies, which has been a long-time VMware partner, said he would like to be optimistic about the potential merger, “but the market coverage is worrying.”
“We have concerns. Our customers are concerned, and the coverage so far has not helped to allay those concerns,” said Keblusek, adding that VMware has always delivered “great” products.
†[VMware] is a large part of our portfolio. We intend to keep that and be part of our portfolio and continue to support our mutual customers. At the same time, we think it should probably be handled in a different way than we’ve seen with some of the previous acquisitions,” said Keblusek. “Our customers are aware. They’re a little concerned about their longer-term future with VMware in their data center.”
Broadcom Software R&D vs VMware R&D
Broadcom Software Group generated $5.17 billion in revenue last year and invested 14 percent of that back into R&D, totaling about $728 million, according to Krause (pictured above).
By comparison, VMware invested about 24 percent of the $12 billion it earned last year in R&D, or about $3 billion.
Broadcom, the chipmaker, spent $4.8 billion on R&D last year on revenue of $27.45 billion. According to the annual report, costs amounted to 21 percent of the company’s revenue.
Last month, Krause said it will focus its R&D investments on VMware’s core, mature product lines.
“In R&D, we’re going to re-invest in the core businesses, the core franchises,” Krause said during a meeting with media and analysts in May. “If you think about the three different pillars of this business, it’s basically the core infrastructure business – vSAN, vSphere, vRealize – these are the companies that generate the bulk of the revenue. And that’s where the reinvestment will take place.”
Is Broadcom ready to ’embrace the channel’?
Krause acknowledged the company’s previous actions with CA and Symantec and said Broadcom had learned from those acquisitions. It was ready to “embrace the channel” and invest in innovation, he said.
“One thing we have learned is that there is an opportunity to embrace the channel, the dual distribution model, distribution partners and key value-added resellers,” Krause said on May 26. of the equation… When you think about what supports software development, there’s a lot of what in the semiconductor side we sometimes call central engineering. So in software business operations, this is the continuous delivery, continuous testing capabilities, the ability to continuously develop applications on a consistent basis – that’s expensive. It requires having your own private data centers or working with cloud providers, and having the scale to drive that kind of R&D investment across a much larger portfolio will also reap significant benefits.
In those same comments to investors, Krause compared the potential deal with VMware to the merger of Avago and Broadcom in 2015.
After that deal, the company stated in its annual report that it had written down $417 million in research and development projects.
“When I think about this deal, it reminds me of the time when we took over classic Broadcom as Avago,” Krause said in May. “This has really changed the times and modernized our semiconductor business. And that’s why we eventually rebranded as Broadcom.”
Lerner said investors should also consider the bigger picture when considering Broadcom’s statement about embracing the channel.
“Since it was mentioned in a public investor call, we have to take it at face value. But context is everything,” Lerner told CRN via email. “Does he mean embracing compared to Symantec/CA, or something else. Time will tell. The facts that a) VMware’s channel and customer base is so much broader than Broadcom’s; and b) they’re rebranding BSG because VMware says they recognize this is different and they should behave differently.”
†