Should VMware ($VMW) Shareholders Ask A Public Cloud To Buy It? Or Are They Happy Giving It Away To AWS For Free?

In October 2016, AWS and VMware announced a partnership for VMware Cloud on AWS. For those of us that have been in the space for some time there is a lot to watch and analyze in these announcements in addition to the implications for shareholders of VMware.

My first reaction to this announcement in 2016, was that it was the earliest pre-announcement for an AWS service that I have seen since I joined AWS in 2010. AWS is usually quite guarded when it comes to new services and releases, so it was surprising to see executive leadership from both AWS and VMware touting this new service so early before it was released.

We are at the end of March 2017, and this offering is currently in “Technology Preview.” When it is fully released, VMware and AWS clients should be able to use VMware’s virtualization and management software to seamlessly deploy and manage VMware workloads across all of their data center and AWS environments. This offering should allow customers to leverage their existing investments in VMware skillsets and tooling to quickly and seamlessly take advantage of the flexibility and economics of the AWS Cloud.

If You Can’t Beat ‘Em, Join ‘Em

As I covered in our Cloud Mania article, giving enterprises ways to adopt public cloud using existing data center skill sets is critically important to continuing consumption for the public clouds like AWS. This type of offering is critically important for players like VMware whose fortunes were declining in the public market with public cloud disrupting their business model.

In early 2016, this began to change for VMware as they acquiesced to the public cloud growth in their customer base with their first large public cloud partnership with IBM. Instead of pushing their own (lackluster) public cloud, vCloud Air, VMware would partner with leading public clouds on behalf of their clients. From the chart above for VMware stock, it is fairly clear that this strategy has been well received by the market. VMware provides the application management framework and it is deployed on whatever infrastructure that the client wants to use.

Sounds Simple, What’s The Catch?

Seasoned watchers of AWS have seen that Amazon is known for being a partner one day, and a competitor the next. This section from the October blog announcing this caught my attention in particular for how this will most like evolve once it is released:

Your investment in packaging, tooling, and training will continue to pay dividends, as will your existing VMware licenses, agreements, and discounts. Everything that you and your team know about ESXi, vSAN, and NSX remain relevant and valuable. You will be able to manage your entire VMware environment (on-premises and AWS) using your existing copy of vCenter, along with tools and scripts that make use of the vCenter APIs. The entire roster of AWS compute, storage, database, analytics, mobile, and IoT services can be directly accessed from your applications. Because your VMware applications will be running in the same data centers as the AWS services, you’ll be able to benefit from fast, low-latency connectivity when you use these services to enhance or extend your applications. You’ll also be able to take advantage of AWS migration tools such as AWS Database Migration Service, AWS Snowball, and AWS Storage Gateway.

When it comes to data center consolidation, you can migrate code and data to AWS without having to alter your existing operational practices, tools, or policies.

When you are ready to modernize, you can take advantage of unique and  powerful features such as Amazon Aurora (a highly scalable relational database designed to be compatible with MySQL), Amazon Redshift (a fast, fully managed, petabyte-scale data warehouse), and many other services.

And if you are a VMware shareholder, that is the catch. This bridge to AWS infrastructure that VMware Cloud on AWS provides may only provide a short- to mid-term boost in sales for VMware. Enterprises purchasing this service as faster way to consolidate their data center resources onto public cloud won’t have the initial difficulty in implementing Infrastructure as Code techniques across their legacy application base. However, once all of their data stores are on AWS, clients will most likely not use VMware Cloud on AWS for new applications and AWS is careful in their wording not to be too verbose with this idea. AWS will be best positioned to take these workloads native over the next 5-10 years leaving VMware investors in a tough long term growth position.

Alternative For VMware Shareholders and Dell, owner of 53% of VMware?

At closing on March 28, 2017, VMware was valued at roughly $38B and any acquisition would probably tack on $7-10B in premium. With Microsoft releasing their hybrid cloud competitor Azure Stack it’s unlikely that a combination with Azure would make a lot of sense, but Microsoft did pay $26B for LinkedIn. In my view that leaves two likely suitors based in the US, Google Cloud and Oracle. You could also have a Chinese public cloud or IBM in contention but I believe the challenges with those two would be significant for different reasons. The deal would have to happen pretty quickly because clients will start moving to AWS as soon as VMware Cloud on AWS becomes GA.

Related: VMware/Dell Equity FAQ

Matthew Scott