AT&T is accusing Broadcom of raising the price of VMware by a whopping 1,050% and trying to renege on a previous agreement, giving AT&T the right to extend an existing contract.

Broadcom acquired VMware in late 2023 and almost immediately began raising prices for existing customers. The company’s tactics have drawn criticism from the cloud industry, with EU cloud organization CISPE calling its actions “brutal” and warning Broadcom “will decimate Europe’s independent cloud infrastructure sector.”

Catch our chat on AT&T claiming Broadcom hiked VMware’s price by 1,050%!

Although not based in the EU, AT&T is one company that Broadcom has tried its heavy-handed tactics with, resulting in AT&T suing Broadcom for breach of contract. AT&T’s original support period was scheduled to expire in early September, but the company had a clause in its VMware license that gave it the option of extending support for up to two additional years. AT&T claimed in its lawsuit that Broadcom was not honoring AT&T’s existing agreement with VMware, insisting the telecoms company pay for additional subscriptions and services that it doesn’t need in order to continue receiving support.

Although AT&T has already advised Broadcom that it is exercising its option to renew support services for at least another year, Broadcom is refusing to honor AT&T’s renewal.

Instead, Broadcom states it will only continue to provide support services if AT&T agrees to purchase scores of subscription services and software that: (1) AT&T does not want or need; (2) would impose significant additional contractual and technological obligations on AT&T; (3) would require AT&T to invest potentially millions to develop its network to accommodate the new software; (4) may violate certain rights of first refusal that AT&T has granted to third-parties; and (5) would cost AT&T tens of millions more than the price of the support services alone.

Despite AT&T’s claims, the details were still a bit fuzzy…at least until now. An email that is being used as evidence in AT&T’s case contains damning information regarding Broadcom’s practices. First spotted by The Register and provided by the outlet, the email is from AT&T executive VP Susan A, Johnson and is seems to be addressed to Brodcom CEO Hock Tan.

After a 10 plus year strategic relationship with Broadcom that started under John Donovan, I am sad to report that we appear to be at an impasse on our VMware deal. The latest offer that we have received would put us at an average of $___ per year for a 5 year deal, where we currently pay $___ per year to support previously purchased perpetual licenses with a right to renew support through September, 2026. This proposed annual increase of +1,050% in one year is extreme and certainly not how we expect strategic partners to engage in doing business with AT&T.

Johnson then goes on to highlight AT&T’s existing agreement with VMware, as well as the company’s willingness to resort to legal action if Broadcom refuses to honor the agreement.

What we are willing to pay for VMware licensing and support is bounded by two basic facts: 1) The strength of our contractual position to pursue a legal course to preclude Broadcom from discontinuing support, and 2) The estimated costs of migrating away from VMware. We are running out of time given Broadcom’s unreasonable position that the agreement does not permit AT&T to exercise its two remaining one-year options after September 9, 2024. As a result, AT&T has decided to pursue a legal strategy along with a disciplined plan to invest to migrate away, all of which will quickly become public. I truly wish we had another option. Unfortunately, this decision will impact the future of our overall relationship and how we manage spend in other Broadcom areas.

Johnson then goes on to summarize AT&T’s position.

In summary:

• We feel that we are being treated very unfairly with a drastic change in how we have been operating with VMware including your failing to abide by our agreement terms and the magnitude of the increase in costs.
• We have reviewed our licensing agreement. We believe we both have enough licenses to
  cover our current usage and that it does legally protect us to preclude Broadcom from discontinuing contractually agreed upon support.
• The cost to migrate away from VMware (projected at $40-$50M) has a very quick payback and strong IRR, especially given the high licensing costs proposed. As a result, we are planning to prioritize investment to migrate off of VMware.

Broadcom’s Business Model Is Backfiring

Broadcom is a successful company with strong books, solid financials, and a track record of solid growth. One of the major concerns many had with a Broadcom buyout of VMware, however, is the former’s brutal efficiency in its pursuit of growth and profitability.

As we wrote when it announced its intention to acquire VMware, Broadcom is known for “requiring business unit leaders to agree to milestones, goals, and financial targets. As long as those are met, everything runs smoothly. If the goals aren’t met, the business leader is given four or five quarters to get on target; otherwise, the business is sold off or killed.” No one had any doubt that Broadcom would require the same of VMware, pushing for price hikes in an effort to boost its margins.

Unfortunately, few could have predicted the astronomical price hikes that Broadcom would inflict on VMware customers, increases so large that many have had no choice but to move to alternative solutions.

Computershare CTO Kevin O’Conner detailed his company’s experience dropping one of the two hypervisor providers it used as a result of price increases in the 10-15x range. Wile O’Conner didn’t specifically say VMware was the hypervisor his company dropped, his presentation left little doubt that’s the company he was referring to. In the case of Computershare, Broadcom/VMware lost a 24,000 license customer.

With AT&T now engaging in a very public fight against what appears to be predatory and “brutal” behavior on the part of Broadcom, it’s a safe bet Broadcom’s tactics are finally catching up with it.