Three years ago, when multinational manufacturer and supplier, Broadcom, acquired cloud and virtualisation firm, VMware, it did so with the ambition of expanding deeper into enterprise infrastructure software and multi-cloud services. Since the acquisition, several major changes have taken hold that are making the impact of the deal much harder to ignore, including price increases and the elimination of perpetual software licences, with customers moving entirely to subscription models.
Fast forward three years and as many of the original agreements have now come up for renewal, customers are facing a very different commercial environment, with many seeing significant increases in their licensing costs.
That is naturally prompting a reassessment of VMware for many organisations, including in the high-profile case of Tesco which, according to reports, is migrating approximately 40,000 licences away from VMware to avoid the 175% to 350% price hikes it faces due to bundled subscriptions.
The VMware story has been well documented in the media, but it’s far from an isolated case of this broader trend involving acquisitions, licence model changes, and the broader enterprise technology market. Of course there are nuances in each of the examples, but there is a common theme that raises an important question.
Is this becoming a symptom of a wider problem with consolidation and vendor power?
VMware is part of a bigger pattern
The VMware example of licence model changes and price hikes is perhaps the most dominant in the headlines, likely because of Tesco’s involvement and the profile it carries. However, Broadcom has taken a similar approach with other major software businesses, including CA and Symantec, while technology giant, Oracle has also pursued a strategy of building scale through acquisitions and subsequently integrating those businesses into its wider technology portfolio.
In another example, Citrix is now undergoing its own transformation under CEO Tom Krause, who previously led Broadcom’s software business and was closely involved in the VMware acquisition.
In each case the circumstances are different, and consolidation is not inherently a bad thing. Larger technology businesses can bring greater investment, stronger support and the resources to develop products at a scale that smaller companies cannot always achieve.
The issue for customers comes when consolidation reduces their ability to respond to changes in commercial terms and they are faced with huge, sometimes business critical price increases where a simple break-up isn’t a straightforward solution. Once a platform becomes deeply embedded in an organisation, moving away from it can be expensive, disruptive and technically complex, creating a very different relationship between supplier and customer.
When choice becomes difficult to exercise
With so many software vendors in existence, each with a different speciality or nuanced functionality, in theory there is an abundance of choice for customers. That is true if a customer is brand new and building a software ecosystem from scratch, but for an established organisation that has spent years building its infrastructure around a particular platform, choice becomes far more limited and complex. It will have accumulated skills, processes, integrations and applications around it. Its IT team will know how to operate the environment, and its wider business will have built dependencies around it. Solutions that have been used for years become part of the furniture.
Switching therefore involves much more than choosing a different licence which is where vendor lock-in becomes particularly important. It rarely attracts much attention when prices remain stable and the technology continues to perform well, allowing customers to roll seamlessly into a new agreement with no impact on price or functionality. That may be the ideal scenario. In reality, vendor lock-in becomes much more visible when commercial teams change and customers discover that leaving is considerably harder than expected.
That does not mean a vendor should be prevented from changing its pricing or business model. Technology companies need to evolve, and customers understand that. But there is a legitimate question about how much choice customers really have when the cost and risk of switching are as high as the 10x figures being reported in the VMware example.
If moving to an alternative requires a major migration programme, retraining staff and accepting operational risk and a far from insignificant level of investment, while renewing means signing another agreement, the path of least resistance isn’t obvious. Should customers accept the cost increase because change is too difficult? Or does the prospect of alternative, more cost-effective solutions with comparable functionality become more attractive, despite the stresses and strains of migration?
Consolidation changes the balance of power
This is why the VMware situation deserves to be discussed as part of a wider conversation about consolidation in enterprise technology. As technology companies acquire established platforms, customers can find themselves dealing with a much larger vendor than the one they originally chose. The new owner may have different commercial priorities, different views on product strategy and a different approach to pricing that customers ultimately have little choice but to absorb.
Again, none of that is necessarily wrong, it comes down to individual business strategy, but there are implications as a customer cannot easily change its own position in response. This is particularly significant for large organisations with complex infrastructure estates. The larger and more critical the technology environment, the greater the potential cost of moving away from it. That can leave businesses exposed to commercial decisions over which they have very little influence.
Restoring the balance of power
Identifying a credible alternative is an important first step to putting some of the balance of power back with the customer as it opens the door to more options. If an organisation knows that its workloads could, if necessary, be moved to another platform, despite the migration headaches it is in a stronger position with the incumbent when negotiating renewals, pricing and commercial terms.
The best-of-both-worlds situation is one where vendors set fair prices for the solutions and functionality that they provide and therefore allow customers to make decisions based on requirements, scope and budget. It’s also why the growth of open-source enterprise infrastructure is important as it gives organisations another option and, in doing so, can help restore some of the negotiating leverage that is lost when businesses become heavily dependent on a single vendor.
Vendors should not dictate the strategy
The biggest lesson from the VMware story and other situations like it where customers are suddenly faced with price hikes at the point of renewal is that infrastructure decisions shouldn’t be so heavily dictated by vendor pricing or subscription model strategy.
Every major renewal should be an opportunity to reassess the market, understand the total cost of ownership and consider whether the current platform still delivers the right balance of capability, flexibility and commercial value. That is particularly important after a major acquisition, when the assumptions that originally informed the technology decision may have changed substantially.
The VMware debate has highlighted what can happen when a technology platform becomes deeply embedded in an organisation and the commercial relationship subsequently changes and should act as a useful warning for the wider enterprise technology market. Vendor consolidation will continue and acquisitions will continue to take place, and with it, vendors will continue to change their pricing and product strategies.
To ensure fairness and stability in the enterprise IT market, customers need to retain the ability to make decisions without being dictated to by vendors with an outsized balance of power. Having options is key and it is all about having enough flexibility to decide what works best for the business when circumstances change.
David Furby
David Furby is Founder and CEO at Novatech, a UK-based company that specialises in providing custom built computer hardware, and IT managed services to businesses and individuals. The company was founded in 1987 and is headquartered in Portsmouth, UK.
