AT&T claims its negotiated contract with VMware pre-Broadcom acquisition is not being honored, casting light on recent product and purchasing changes Broadcom has instituted.
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This story was updated 9/30/2024.
AT&T is objecting to Broadcom's definition of an end of availability provision as it applies to a two-year option for an extension of VMware support services.
In its latest response as part of a lawsuit, AT&T stated that it met the required timeline for the renewal request; that support services have not been retired but repackaged; and that even if the services had been retired, Broadcom still has an obligation to uphold its end of the contract.
AT&T filed its lawsuit in late August, claiming that the support contract negotiated with VMware prior to Broadcom's 2023 acquisition should be honored, but Broadcom now requires buy-in to the newly introduced VMware software subscriptions for support to continue.
The two companies came to a temporary agreement to continue the customer's VMware licensing contract with a support extension for one month as the telecommunications giant pushes back against the vendor's new subscription sales model. They are scheduled to deliver opening remarks Oct. 15.
The lawsuit is a flashpoint for Broadcom's relationship to VMware software customers, which has soured significantly over the past year, according to industry analysts, attorneys and VMware customers. AT&T is the first VMware customer to take Broadcom to court over the licensing changes.
After closing on its acquisition, Broadcom reduced VMware's product lineup to four core subscription offerings. The most expensive and feature-rich offering is VMware Cloud Foundation (VCF), a private cloud platform.
As part of the shift to bundled subscription services, Broadcom also discontinued perpetual license purchases for individual VMware software components such as its vSphere virtualization software and NSX networking tools. Some customers anticipate costs to increase considerably as a result of these changes.
In its Sept. 27 filing, AT&T included an email correspondence that suggested an outsized increase in costs. AT&T's Susan Johnson wrote an email to Broadcom CEO Hock Tan, dated Aug. 19, in which she said the "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."
An uptick in customer dissatisfaction isn't out of the ordinary for Broadcom acquisitions, according to Marc Staimer, president and founder of Dragon Slayer Consulting.
Broadcom's acquisition history has led to price increases and an exodus of customers before, he said, when selling off CA Technologies' Veracode or Symantec's enterprise software. But AT&T is a unique challenge for the company's VMware buy.
Broadcom wants to court a handful of major, heavily invested VMware customers like AT&T rather than supporting thousands of smaller or midsize customers using the platform, Staimer said. AT&T's pushback to Broadcom's plan creates an optics challenge for the company.
Staimer also expects the suit to embolden more customers to challenge Broadcom's hard line on licensing contracts.
"You don't make these kinds of changes if you don't expect to lose customers," Staimer said. "[But] you should never let something like this go to a lawsuit. They're playing chicken with one another to see who will blink first. I'd guess Broadcom would."
A timeline of VMware's history.
Your lawsuit, close at hand
AT&T's injunctive relief lawsuit, filed in New York State Supreme Court on Aug. 29, claims VMware agreed to support AT&T's VMware software purchases through a service agreement prior to its acquisition by Broadcom.
An amended contract signed by AT&T and VMware in August 2022 would continue support until Sept. 8, 2024, and provided AT&T the option to renew for two additional years, according to the filing.
Following Broadcom's acquisition of VMware in November 2023, AT&T claims, Broadcom said it would continue providing support only if AT&T purchased VMware software through one of the newly introduced subscription packages, which require three-year contracts.
"Broadcom has every right to change VMware's business model prospectively," attorneys for AT&T wrote in the lawsuit. "What it cannot do, however, is retroactively change existing VMware contracts to match its new corporate strategy. ... Broadcom states it will only continue to provide support services if AT&T agrees to purchase scores of subscription services and software that ... AT&T does not want or need."
AT&T isn't seeking immediate damages, according to the filing, but requested a permanent injunction for Broadcom to honor the original contract of providing support extensions. The two companies reached a temporary agreement for Broadcom to extend support services until Oct. 8. Both parties will return to court on Oct. 15 for the initial injunction hearing.
In an email response to TechTarget Editorial, Broadcom said it plans to stand by the new subscription model requirements.
"Broadcom strongly disagrees with the allegations and is confident we will prevail in the legal process," a spokesperson stated. "VMware has been moving to a subscription model, the standard for the software industry, for several years -- beginning before the acquisition by Broadcom. Our focus will continue to be providing our customers choice and flexibility while helping them address their most complex technology challenges."
The day the VM caught fire
AT&T did not respond to a request for comment by press time, but has not minced words in its court filing.
In the lawsuit, the company claims almost 75,000 of its virtual machines run on VMware software with 22,000 of those connected in some way to public safety offices, both federal and local. AT&T said its customer support centers use the software as well, answering close to 1 million customer requests daily.
"Without Support Services, the operating systems of countless AT&T customers -- including the Government and Intelligence Agencies -- are just one issue away from failing," according to the court filing.
To make its case, AT&T might have to show how it couldn't swap VMware out for another virtualization software in a timely manner and why cutting support would immediately lead to service failures, said Neel Chatterjee, a litigation partner at Goodwin Procter.
[The court] will ask how your hair is on fire now and how you could have prevented that from happening.
Neel ChatterjeeLitigation partner, Goodwin Procter
"[The court] will ask how your hair is on fire now and how you could have prevented that from happening," he said.
In July, CrowdStrike released an automatic update that caused millions of Microsoft Windows machines to crash, creating massive system outages. Delta systems were offline longer than other airlines, leading to more than a week of disruption. The airline now claims the outage cost it $500 million.
Delta might argue it had no alternatives due to the market ubiquity of Windows. AT&T could employ a similar tactic with Broadcom, Chatterjee said. How such an argument will hold up in court will depend on the contract between AT&T and VMware, which is currently redacted from public viewing.
"A company like AT&T would always have another source of supply," he said. "[A court decision] will be heavily driven on what the contract is and what the escape valves are."
Underestimated customers
AT&T's frustration is similar to other VMware customers that have used the platform over the years either due to preference or necessity, according to Steve McDowell, founder and analyst at NAND Research.
"It's very unusual for customers to sue their vendors," McDowell said. "I think Broadcom grossly underestimated how passionate the customer base is, [but] it's a captive audience."
Brian Kirsch, network program chair at Milwaukee Area Technical College, is among those feeling jilted after Broadcom eliminated discounted VMware educational licensing last month. He's now assembling a new curriculum using the open source Proxmox virtualization platform with other education software vendors and teachers.
Virtualization software, compared with other prior products Broadcom has acquired, is often deeply entwined with an organization's infrastructure, making migration or replacement a long and difficult process, Kirsch said. VMware has become the de facto virtualization standard, and alternative platforms don't offer the breadth and depth of features, he added.
Like Kirsch and other VMware customers, AT&T is exploring alternatives, but likely wouldn't transition anytime soon, he said.
"[AT&T] knows they can't go anywhere," Kirsch said. "You cannot rip and replace infrastructure like that in a timely fashion."
He said Broadcom likely anticipates a customer exodus, but the value extracted from these customers over the next several years will likely offset VMware's $69 billion price tag.
"Usually, when you get that bad taste in your mouth, you do what you have to to get off that vendor," Kirsch said. "They'll milk it until the profits are no longer there and it's a shell of [a company]. They know they've only got about three to four years."
Still, subscription packaging of VMware software remains successful, according to Broadcom CEO Hock Tan.
During Broadcom's third-quarter fiscal 2024 earnings call on Sept. 5, Tan reported that Broadcom's infrastructure software revenue increased 200% compared with Q3 2023 to about $5.8 billion, with $3.8 billion of that attributed to VMware. He also said VMware reduced spending from $1.6 billion in the second quarter to $1.3 billion in Q3, but did not specify from where.
"The transformation of the business model of VMware continues to progress very well," Tan said during the call.
Senior News Director Nicole Laskowski contributed to this report.
Tim McCarthy is a news writer for TechTarget Editorial covering cloud and data storage.
