The Six Five team discusses the Broadcom-VMWare Deal Approved by the European Union.
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Transcript:
Patrick Moorhead: Yeah, so these are always long-term sagas and anything that has to do with regulatory bodies. But the deal was approved by EU regulators with some conditions, and those conditions have everything to do with competitive hardware folks like Marvell, likely Nvidia, Samsung, and maybe even Cisco, and also at least according to AP, also talked about potential future competitors. I just love how these regulatory antitrust bodies are looking to the future and not actually what happens, but it is where we are right now. By the way, all of this was a little bit farcical as all you have to do is first of all, be a business person and understand business. Look at Broadcom’s business model and the way they make money and what they’re motivated by. It’s all about money. It always has been and it always will.
The amount of cash that this company brings in is staggering compared to any other semiconductor company and even most tech companies out there. Broadcom is buying VMware for its multi-cloud capabilities, which, to be honest, VMware hasn’t been able to monetize that well if you look at their revenue profile. Hock, early on, committed to not raising prices specifically on virtualization. What people don’t even understand as well, it’s not that hard as you think to shift and move off of a certain virtualization vendor. Let’s say, going from VMware to KVM or Microsoft, it’s not that hard. There are companies that this is all that they do.
At least in terms of virtualization, VMware makes most of their money that supports old hardware, not supporting new hardware or cutting off older competitive hardware. The last comment that I’ll make about the monetization is, you make let’s say, $500 on NIC card and $14,000 on VMware licensing, why on earth would you prioritize hardware over software licenses? So I think this deal is going to go through, and I think it’s just up. I said this, I think, in the first video we did on this, Broadcom’s going to have to make some concessions. It looks like they did with EU, and they’ll make those concessions likely globally with the same cast of characters like Marvell, Samsung, Intel, and Nvidia, and this deal is going through.
Daniel Newman: So yeah, let’s move on. No, I’m kidding. I’ve said this for a while. I think a victory lap queue is in order for you and I. There was some naysayers in the public domain that desperately didn’t want this deal to go through. They were wrong, they were all wrong. These are the same people that don’t think Apple should probably be investigated for any of their app store and competitive strategic moves that basically make you pay a toll to play in the marketplace. Anyway, I digress. There just wasn’t enough here. Now the EU, the UK, the FTC, they all need to get their pound of flesh, and their pound of flesh is sometimes going to be in dollars and in this case, sometimes going to come in concessions. There are certain concerns. The Marvell concern is probably the most substantial, somewhat unrelated, but related to make sure that there’s competitive material provided for networking requirements.
Pat, candidly, I find it somewhat shocking it’s taking this long, but it is a large deal. You’re talking about more than $60 billion. You’re talking about a significant disruption in a channel in the way customers consume this product. I’m going to make another prediction. I know this probably won’t make all the VMware fans happy. The company will be substantially more successful under Broadcom than it has been. I’m not talking about success from a product adoption standpoint, I’m talking about the company’s ability to make money. Hock Tan, and if you haven’t watched our Six Five interview with Hock, he’s prolific in this particular area, and he’s incredibly competent to look at a company. There’s some interesting data points about the number of employees at Broadcom versus the number of employees at VMware, and then the amount of revenue and then the amount of profit.
I think you’re going to see another version of this wildly slimmed-down organization, and I think VMware plus Broadcom, I could see a yield of 30% reduction in headcount. I’m not saying that through a positive lens, I’m saying that through the lens of Hock is going to find a way to move away from these smaller EBITDA production. He’s going to be able to drive high-dollar per share value in terms of EBITDA on the product. He’s going to maximize the success of the strong products. He’ll probably put out or put to rest and sunset some of the innovations that either hadn’t taken off or didn’t have longer term potential. But to your point, without getting down the whole path of why this is a good deal, this went through because it should. This went through because it wasn’t anti-competitive in a substantial way, it got held up because of the size. Moving on, this deal, we’re going to talk about it one more time probably when it actually gets done, but the fact that we’ve had to talk about this much-
Patrick Moorhead: Well, here’s so weird too, Dan, is they’re a hardware company with a little bit of software buying more software. It’s not like gigantic software company buying a competitive software company or a giant hardware company buying a competitive hardware company. This is so far out of the lens, it just absolutely makes no sense to me. It’s just weird, and again, gets into this just overall oddity of the regulators. Either they’re looking at the wrong things and the wrong companies. They’re looking in a crystal ball in the future as opposed to want and disregard for antitrust damages that already happened, and let’s penalize those companies or maybe break them up into pieces or regulate them higher. I hate regulation, but when you have companies breaking the law like Apple, things need to happen. Then the basic lack of understanding of business 101, I feel like I knew more about business when I was 22 than these East Coast-educated Ivy Leaguers at the FTC and the DOJ. They just don’t understand the reality of business, and it’s a waste of taxpayer dollars. It’s a waste of time, and it’s inhibiting innovation.
Daniel Newman: Yeah, no, absolutely. Look, the East Coast elites, I think is what you’re trying to say. You know what I mean?
Patrick Moorhead: There are West Coast elites too.
Daniel Newman: It’s not just about that, it’s about political agendas. The problem is, is that are we regulating or are we politicking and-
Patrick Moorhead: Are we punishing success, right?
Daniel Newman: Well, but I’m saying I agree, but I’m saying the most successful company that’s most obviously teetering on the line of legality as in terms of antitrust law doesn’t really get regulated. So I don’t know, I guess there is a too big to be regulated that go with the banks. It’s the J.P. Morgan of tech, so I don’t know. It’s interesting. It’s going to be a really fun one to watch.
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
