Broadcom recently acquired virtualization giant VMware in a $61 billion deal that closed in November 2022. As part of Broadcom’s strategy to maximize VMware’s value, the company has decided to shift VMware’s business model entirely to a subscription-based approach.
Effective December 11, 2022, VMware ceased offering perpetual licenses and related support and subscription services for its products. This includes popular solutions like vSphere, vSAN, NSX, and vCloud Suite. Customers can no longer purchase VMware products with a one-time upfront perpetual license cost.
VMware will now only sell its software via term-based subscriptions. This provides recurring subscription revenue versus a single license purchase. It also contractually obligates customers to ongoing payments to maintain access to VMware products.
Broadcom aims to rapidly expand VMware’s subscription transition over the next three years. The goal is to grow VMware’s EBITDA from around $4.7 billion currently to approximately $8.5 billion by 2025. Shifting to subscriptions is the primary vehicle Broadcom plans to achieve this aggressive target.
Existing VMware perpetual license customers can continue using their purchased licenses. However, they will lose access to ongoing support and updates when their current support contract expires. At that point, customers would need to transition to a subscription model to keep receiving product upgrades and assistance.
Industry Reaction
While subscriptions are common for cloud-based software models, this transition uproots VMware’s perpetual license heritage. It remains unclear whether customers will embrace paying a recurring fee for previously purchased capabilities.
Some VMware partners have reported hesitancy and concerns from customers about potential price hikes. Channel partners also worry about support continuity given Broadcom’s widespread VMware layoffs. On the other hand, several partners note success with subscription models and their potential to encourage more strategic customer engagements.
Customer sentiment likely depends on specific VMware product usage and reliance. Organizations that recently purchased perpetual licenses may feel shortchanged by suddenly losing the option to pay once and use the software indefinitely.
Others may accept subscriptions as the standard modern approach for business software, especially given VMware’s expanding cloud and SaaS capabilities. Ongoing subscription costs are also tax deductible as regular operating expenses, offering financial flexibility.
Nonetheless, Broadcom is fully committed to complete the transition across VMware’s portfolio. The company is incentivizing customers to upgrade from perpetual licenses to subscriptions but has not published detailed conditions.
It remains to be seen how customers across VMware’s broad enterprise customer base will respond. But Broadcom is clearly ready to accelerate VMware’s recurring revenue subscription model to meet its ambitious EBITDA goals. Expect sweeping changes in how clients pay for and consume VMware technologies over the next few years.