Broadcom and AT&T have reached a temporary arrangement to extend the VMware licensing agreement for customers, providing an additional month of support as AT&T challenges the vendor’s new subscription sales approach.
AT&T contends that the support contract established with VMware before Broadcom’s acquisition in 2023 should remain in effect. However, Broadcom now insists that AT&T must adopt the newly launched VMware software subscriptions to maintain access to support. The two companies are set to make opening statements on October 15.
The lawsuit marks a significant moment in Broadcom’s interaction with VMware customers, which has become increasingly tense over the past year, as noted by industry analysts, attorneys, and VMware clients. AT&T is the first VMware customer to legally contest Broadcom’s licensing changes.
Following the completion of its acquisition, Broadcom narrowed down VMware’s offerings to four main subscription products, with VMware Cloud Foundation (VCF)—a private cloud platform—being the most expensive and feature-rich. As part of the transition to bundled subscription offerings, Broadcom has also eliminated the option for customers to purchase perpetual licenses for standalone VMware software components such as vSphere and NSX. Many customers are bracing for substantial cost increases due to these modifications.
An increase in customer dissatisfaction is typical in Broadcom acquisitions, according to Marc Staimer, founder and president of Dragon Slayer Consulting. He noted that Broadcom’s history includes price hikes and customer losses, such as during the sales of CA Technologies’ Veracode and Symantec’s enterprise software. However, he emphasized that AT&T presents a unique challenge for Broadcom’s VMware initiative.
Broadcom seeks to focus on a select few major VMware clients like AT&T rather than catering to a larger base of smaller organizations, Staimer explained. AT&T’s resistance to Broadcom’s plan presents an optics challenge for the company.
Staimer also anticipates that the lawsuit may inspire other customers to contest Broadcom’s rigid stance on licensing agreements.
“You don’t make these kinds of changes without expecting some customer losses,” Staimer commented. “However, allowing this to escalate into a lawsuit is a misstep. They are effectively playing a game of chicken to see who will yield first—my guess is it will be Broadcom.”
### Lawsuit Overview
AT&T filed an injunctive relief lawsuit in the New York State Supreme Court on August 29, asserting that VMware had committed to supporting AT&T’s software purchases through a service agreement prior to Broadcom’s acquisition.
An amended contract signed in August 2022 ensured support would continue until September 8, 2024, with an option for AT&T to extend it for an additional two years, according to the lawsuit. Following Broadcom’s acquisition in November 2023, AT&T alleges that Broadcom claimed it would only provide support if AT&T enrolled in the new subscription packages, which necessitate three-year commitments.
“While Broadcom has the right to modify VMware’s business model going forward, it cannot retroactively alter existing contracts to align with its new corporate strategy,” AT&T’s attorneys wrote. “Broadcom insists it will only maintain support services if AT&T agrees to purchase numerous subscription services that it neither wants nor needs.”
AT&T is not seeking immediate damages; instead, it is requesting a permanent injunction to force Broadcom to adhere to the original support agreement. Both parties reached a provisional agreement to extend support until October 8, with a court hearing scheduled for October 15 regarding the initial injunction.
In a statement to TechTarget Editorial, Broadcom expressed its intention to uphold its new subscription model requirements. “Broadcom strongly contests the allegations and is confident in our position throughout this legal process,” a representative stated. “The shift to a subscription model has been a trend within the software industry for years, a strategy that began prior to the Broadcom acquisition. Our goal remains to offer our customers flexibility and choice as they tackle complex technological challenges.”
### Potential Ramifications
While AT&T did not respond to requests for comments before publication, its lawsuit lays out significant concerns. The company explains that nearly 75,000 of its virtual machines operate on VMware software, with around 22,000 connected to various public safety offices at both federal and local levels. Furthermore, AT&T’s customer support centers utilize this software, handling nearly 1 million customer requests daily.
“Without Support Services, countless AT&T customers—including governmental and intelligence agencies—are merely an issue away from system failure,” the filing read.
To substantiate its claim, AT&T must likely demonstrate the difficulties in promptly transitioning to an alternative virtualization software and highlight how the withdrawal of support could lead to immediate service disruptions, noted Neel Chatterjee, a litigation partner at Goodwin Procter.
The court could pose the question of how AT&T’s current predicament arose and what preventive measures could have helped avoid it.
“There is a parallel with the ongoing legal case between Delta Air Lines and CrowdStrike,” Chatterjee commented. In July, CrowdStrike issued an update that caused a vast number of Microsoft Windows machines to crash, leading to major system outages. Delta’s systems were offline longer than those of other airlines, incurring a disruption cost of $500 million. Delta may argue that alternatives to Windows weren’t feasible given its widespread adoption. Similarly, AT&T could pursue a line of reasoning with Broadcom, but whether this holds legal weight will depend heavily on the specifics of the contract, which is currently privately held.
“[AT&T] would likely have alternative suppliers available,” Chatterjee explained. “The final ruling will largely depend on the contract’s terms and any potential escape clauses.”
### Customer Challenges
AT&T’s frustrations are echoed by other VMware customers, who have long relied on the platform out of necessity or preference, as Steve McDowell, founder and analyst at NAND Research, observed.
“It is quite rare for customers to take legal action against their vendors,” McDowell stated. “I think Broadcom has seriously underestimated the loyalty and passion of its customer base, even though some may feel trapped.”
Brian Kirsch, network program chair at Milwaukee Area Technical College, has felt overlooked after Broadcom phased out discounted VMware educational licenses last month. Kirsch is now developing a new curriculum that utilizes the open-source Proxmox virtualization platform alongside other educational software vendors and instructors.
He noted that virtualization software is often deeply integrated into an organization’s infrastructure, making replacement a complex and lengthy process. VMware has become the industry standard in virtualization, and rival platforms typically lack its range of capabilities.
Like Kirsch and other VMware customers, AT&T is exploring alternative options, though a quick transition would be highly improbable, he remarked.
“AT&T recognizes that they face significant barriers in migrating away,” Kirsch said. “The infrastructure cannot be overhauled rapidly.”
He speculated that while Broadcom may anticipate customer losses, the revenue derived from these clients over the next few years is expected to counterbalance VMware’s $69 billion acquisition cost.
“When customer dissatisfaction sets in, businesses typically seek to change vendors,” Kirsch discussed. “Broadcom will continue to capitalize on this relationship until it becomes unsustainable, knowing they have perhaps three to four years left in this model.”
Despite tensions, the subscription model for VMware software appears to be thriving. Broadcom CEO Hock Tan reported during the company’s third-quarter fiscal 2024 earnings call on September 5 that their infrastructure software revenue surged by 200% compared to Q3 2023, reaching approximately $5.8 billion, with $3.8 billion attributable to VMware. He also mentioned that VMware had reduced its expenditures from $1.6 billion to $1.3 billion in Q3, without specifying the areas of reduction.
“The transition of VMware’s business model is proceeding very successfully,” Tan stated during the call.
Tim McCarthy is a news writer for TechTarget Editorial, covering cloud and data storage.