Report calls for regulation of “legally and ethically flawed” VMware

"Broadcom is unlikely to make any voluntary changes to its new commercial terms."

VMware's business model under Broadcom is "legally and ethically flawed," a group of cloud service provider (CSP) customers and partners alleged in a report released today.

The report (PDF) comes from the European Cloud Competition Observatory (ECCO), which describes itself as "independent monitoring body" composed of members of the Cloud Infrastructure Services Providers in Europe (CISPE) trade association, "with the support—acting as observers—of European customer organizations." ECCO says its goals include "highlighting ongoing or new unfair software licensing practices from any software vendors in the cloud sector," and it has previously written similar reports about Broadcom and Microsoft.

In its announcement of the report, ECCO said that CISPE members have met with Broadcom once about the changes it has made to VMware's business model, which is now built around subscriptions of bundled products, but didn't see any changes.

The report says that VMware customers who have moved to subscriptions are enduring “substantial financial burdens and operational disadvantages" and pushes for regulatory action. The current subscription model "creates a material risk for the company and their shareholders should Regulators investigate and challenge the legality of such model," the authors added.

The report also laments Broadcom's "highly litigious approach to partners and customers," pointing to cease-and-desist letters that Broadcom sent to VMware perpetual license holders and since-settled litigation with Siemens that accused its US operations of pirating "thousands" of copies of VMware software. The report says VMware CSP partners fear becoming targets in Broadcom's VMware-related legal pursuits.

"In the absence of any critical changes and adaptations to its licensing terms, measures including the reinstating of previous contract, the suspension of ongoing litigation initiated by Broadcom as a result of change of terms, should urgently be considered by the Regulator," the report reads.

The report also points to a filing by the German IT customer association VOICE to the European Commission accusing Broadcom/VMware of antitrust violations.

"VOICE specifically accuses Broadcom of imposing exorbitant and unfair price increases by arbitrarily bundling products as part of the transition from perpetual licensing to subscription-based licensing," said a Google translation of the German press release announcing the filing from May 7. "This also makes it more difficult for Broadcom's competitors to sell their products to existing Broadcom/VMware customers. Only through these abusive practices is Broadcom able to achieve the sales and profit targets announced for VMware."

VOICE's filing "further emphasizes the need for definitive action to end these harmful practices," ECCO's report says.

Cloud partners under pressure

After Broadcom bought VMware, the virtualization firm's approach to working with resellers changed. Smaller partners weren't invited into Broadcom's partner program for reselling VMware, and Broadcom killed VMware's CSP-specific partner program. As a result, many resellers now opt to buy VMware support or services from larger resellers. Many small CSPs have found it financially unsustainable to continue working with VMware.

ECCO's report claims that while most CISPE members have entered new licensing agreements with VMware, "these agreements were often signed under significant pressure, influenced by a lack of alternatives, abrupt contract terminations, and financial incentives such as rebates for longer-term commitments."

“Broadcom can report that most have signed new contracts, but we know that these are punitive and threaten the viability of service providers locked-in to the VMware ecosystem," Francisco Mingorance, secretary general of CISPE, said in a statement.

ECCO also expressed concern about Broadcom's ongoing changes to its partner program, including "reassessing incentives, requirements, and tiering structures," as announced earlier this month.

“Urgent measures”

ECCO's report lists numerous "minimum urgent measures" that it believes Broadcom should take in order to make its VMware business model ethical, including guaranteeing at least "six months’ notice prior to any changes to contractual terms, pricing structures, or conditions applicable to renewals.”

However, given Broadcom's financial success since acquiring VMware, it appears improbable that the tech giant will overhaul its business strategy.

"Broadcom is unlikely to make any voluntary changes to its new commercial terms. On the contrary[,] we fear it may further tighten conditions, as shown by recent moves to raise the bar for eligibility in partner programs," Mingorance told Ars Technica via email, pointing to a need for "firm regulatory action."

ECCO's report also comes as many VMware customers, especially small to medium-sized businesses, have found alternatives to VMware, including other virtualization platforms, or are researching how to reduce their VMware dependence.

"Those who could leave have mostly done so, but they are the minority," Mingorance said. "The rest are effectively locked in until credible alternative virtualization solutions, including third-party certified options like SAP, become available. That’s not yet the case."

When asked for comment on ECCO's allegations of "legally and ethically flawed" VMware practices and putting customers at financial disadvantages, a Broadcom spokesperson shared a statement focusing on Broadcom's relationship with CSPs:

As a strategic partner with over 140 European [CSPs], of which more than 40 provide sovereign cloud services, Broadcom is working to advance the European Union's sovereign cloud objectives and enable enterprises of all kinds to accelerate innovation, provide more choice, and address their most complex technology challenges. We welcome the opportunity to have a constructive dialogue with CISPE on how our products can help their European members be more competitive and innovative.

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