By Isabelle Bousquette
A Europe-based trade group Tuesday asked regulators to intervene in pricing and business model changes made by Broadcom to VMware, a cloud-computing and virtualization company it acquired late last year.
Members of the group, known as Cloud Infrastructure Service Providers of Europe, or CISPE, said that changes taking place this month within the Broadcom VMware's partnership program mean that companies that license and then resell VMware software will need to eat higher costs internally or pass them onto customers.
VMware partners attribute higher prices to a combination of factors including VMware moving from perpetual licenses to a subscription model and changing the way it calculates billing. Broadcom said the changes will result in better value for customers in the long term.
CISPE in a release wrote that as a market leader in the cloud virtualization sector, Broadcom's VMware should be regarded as a "gatekeeper" under the terms of the European Union's Digital Markets Act, adding: "Its actions should be seen as those of a dominant player as it forces 'take it or leave it' terms on customers." Francisco Mingorance, secretary general of CISPE, said he was calling on both European and national regulatory bodies to institute a freeze on the termination of existing contracts.
Those partners who want to walk away say they need at least a year to make that happen; moving away from VMware can be incredibly costly and require years of time as well as specialized, in-demand talent.
"It's a very big mess," said Mingorance about the changes. "They hold the knife." CISPE members include cloud giant Amazon Web Services, which declined to comment for this article, as well as smaller service providers like U.K.-based Hyve Managed Hosting and Italy-based FlameNetworks.
Founded in 1998, VMware is a pioneer of virtualization, a critical building block for what would become cloud computing, in which hardware, such as a physical server, can be swapped out for software. Broadcom's $69 billion acquisition of the company was completed in November, followed by a flurry of changes.
Broadcom has made its name in part by acquiring tech companies, then cutting costs and leveraging the company's growing pricing power.
"We overhauled our software portfolio, our go-to-market approach and the overall organizational structure. We've changed how and through whom we will sell our software, said Broadcom CEO Hock Tan in a March 14 blog post. "And we've completed the software business-model transition that began to accelerate in 2019, from selling perpetual software to subscription licensing only -- the industry standard."
Broadcom declined to comment on CISPE's release beyond sharing this blog post.
The overhaul has drawn the attention of chief information officers.
"Of course, we recognize that this level of change has understandably created some unease among our customers and partners," Tan wrote, adding that the moves come with the goals of innovating faster, meeting customers' needs effectively and making it easier to do business with the company, as well as aid in profitability and market opportunity.
Among the changes were an overhaul of VMware's partner network. Some partner relationships were terminated while others were invited to remain, with a deadline of the end of this month to sign new contracts.
Hyve was invited to continue. Director and co-founder Jake Madders says he is concerned about the new minimum spend required by the new contract -- higher than the previous minimum spend -- and new billing structure. Madders said he doesn't have time to approach customers about the new costs before locking into the new contract.
He said that he would have to pass on the higher costs to Hyve's customers or in some cases eat those costs internally. The risk of raising costs with customers is that they might opt to move away from buying VMware, leaving Hyve stuck with the minimum spend anyway.
"It has been quite a panic," Madders said. "It all happened so fast."
He added, "The reality is we love VMware; we love their software. It's a really amazing piece of virtualization. And we built a business around it, so we can't jump ship. We can't abandon it. But it's kind of a difficult time in the industry in general to be up in prices."
At FlameNetworks, CEO and founder Fabrizio Leo said he was not invited to join the revamped partnership program, meaning he now has to find someone else to license it to continue serving his customers.
Leo said the shift from perpetual licenses to the subscription model translates to a major cost increase for the company. He is eager to find alternatives, but said it would take a year and a half to migrate to a new technology.
"It's important for CISPE to conduct this battle," he said.
Write to Isabelle Bousquette at isabelle.bousquette@wsj.com
(END) Dow Jones Newswires
March 20, 2024 07:00 ET (11:00 GMT)
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