Broadcom's VMware squeeze meets its European reckoning

When the European Union cleared Broadcom's $61bn takeover of VMware in 2023, it recorded its doubts and then, with undertakings attached, let the deal through. Three years later it is back — not to unpick the merger, but to interrogate how Broadcom runs what it bought. In recent weeks Brussels has pressed European cloud providers for details of how heavily they lean on VMware and how easily they could switch away, ahead of a key deadline in a dispute that already carries the threat of interim measures.

The questions aim at the mechanism at the heart of the deal, and at why the two sides are now talking past each other. Within months of closing the deal, Broadcom ended VMware's perpetual licences, collapsed roughly 8,000 product SKUs into four subscription bundles, and cut its European resale channel to a handful of hand-picked partners. The logic was ruthless and internally coherent. Broadcom had paid about a 40% premium to bag VMware; its path back to a sensible return lay in converting a captive installed base from one-time licences into recurring subscriptions, and in controlling who was allowed to sell them. Europe, VMware's largest non-American market, was where the leverage had to be exercised hardest.

That is what the EU is scrutinising, and it is why the scrutiny cuts deeper than a headline fine. The complainant, an industry body called Cloud Infrastructure Services Providers in Europe (CISPE), counts Microsoft and Amazon among its associate members; Broadcom retorts that the group is "funded by hyperscalers" and is defending its members' resale margins rather than their customers. There is something in that. Yet the Commission has asked European cloud firms about the same two things that decide whether Broadcom's squeeze is durable profit or self-inflicted churn: how indispensable VMware is to them, and what their alternatives would cost.

For an investor the useful question is how much of this actually matters to a company that has outgrown its software complaints. Broadcom's infrastructure software arm — the segment that holds VMware — booked $7.18bn in its fiscal second quarter, a shade under a third of total revenue, at a gross margin near 93% and an operating margin close to 79%. That profit is the reliable funding stream behind a capital-hungry AI custom-chip business that has since pushed quarterly revenue above $29bn, up 86% year on year. The software segment "cannot be disintermediated or replaced", Mr Tan likes to say; VMware's annual recurring revenue was still growing in the high teens last year.

The trouble is that the extraction model and its customer base are moving in opposite directions. Broadcom's own ecosystem surveys show the squeeze is registering where it counts. A survey of more than 300 IT decision-makers found 86% actively reducing their VMware footprint, even if only a handful have fully left; most reported renewal costs rising by 25–50%. When the infrastructure software segment missed consensus by a relatively small margin in the fiscal second quarter, Broadcom's shares fell about 3% despite record AI results — a reminder that investors already price the software engine's fragility, and that a sustained slowdown there raises questions about the funder of the AI bet.

None of this means the EU will find against Broadcom, and the procedural history counsels caution. When the General Court refused in early August to suspend a Commission demand for American legal documents, it was ruling on privilege and the scope of the investigators' powers, not on the merits. No formal infringement finding has been made. The real, persistent threat is not the fine — capped at 10% of annual global revenue, roughly $6bn on last year's $63.9bn, considerably less than a single quarter's operating profit — but interim measures and behavioural remedies that would trim Broadcom's pricing and channel leverage in Europe where its hand is strongest.

So read the case for what it indexes rather than what it threatens. Brussels is deliberating on whether customers have real alternatives to VMware; Broadcom's behaviour is simultaneously testing that question in the market, by giving captive customers reasons to seek one. The two inquiries are not the same, but they reinforce each other, and they sit atop a stock that — for all the AI fireworks — has lagged the market badly this year. The EU probe neither endangers the AI thesis nor excuses it. It is a reminder that part of the software division's "growth" is repricing a base that is quietly, deliberately, unwinding.