The European Commission (EC) expressed concern over semiconductor producer Broadcom’s proposed acquisition of cloud computing company VMware. Broadcom CEO Hock E. Tan correctly pointed out how the proposed acquisition would greatly benefit competition in the cloud computing space since “bigness” is the innovation that makes cloud computing so efficient. Though this seems counterintuitive to agencies that are myopically anti-merger, creating a larger cloud computing company will help disrupt the tech firms currently dominating that market.
Broadcom initially announced its acquisition of VMware for around $61 billion in May 2022. The proposal outlined how it would increase production efficiency and accelerate scalability opportunities. The EC flagged this merger as potentially uncompetitive because VMware currently sells parts to Broadcom’s competitors, and after the acquisition, these items could be made inoperable. The EC presumes such a move would benefit Broadcom since it restricts needed software to other semiconductor firms.
Founder and Chief Analyst of Moor Insight & Strategy, Patrick Moorhead, has evaluated these claims in-depth in multiple publications. In an article with Forbes, Moorhead outlines how the acquisition of VMware is unlikely to result in inoperability but instead would increase competition in the cloud computing market, something the EC has made clear they want. He argues that Tan has every incentive not to cut out VMware’s existing customer base as such a move would destroy revenues and provide few benefits since these customers could easily switch providers. The competitiveness of the cloud computing market makes inhibiting VMware’s compatibility with other firms unwise.
In 1956, regulators made a similar mistake with the first generation of commercial computation. AT&T, which dominated the telecommunications industry then, was moving into mainframe computing. The government, fearing an AT&T monopoly, prevented them from entering the market. Ultimately, IBM monopolized the industry until the late 90s when mainframe computing lost market share to personal computing. Though this can’t be solely attributed to AT&T being kept out of the market, AT&T would have undoubtedly added to the market’s competitiveness.
AT&T was thought too big to enter mainframe computing, yet big companies are the best remedy to market concentrations. Tan understands this, and so does Moorhead. Regulators can’t have their cake and eat it too, and they certainly can’t prevent new entrants into a market and then complain that that market is “overconcentrated.”
It’s clear that Tan has a massive incentive to leverage a Broadcom-VMware union to move into the cloud computing market using VMware’s unique business approach. Their hybrid cloud and server model approach increases customer choices in data processing.
Though the current cloud computing market is far from uncompetitive, with three major and multiple minor options available for companies and individuals looking to outsource computation, why would the EC put unnecessary limits on new entrants?
The United Kingdom (UK) has also targeted the Broadcom-VMware acquisition, with the UK’s Competition and Market Authority (CMA) releasing an inquiry earlier this year. UK communications regulator Ofcom has also released complaints that cloud computing in the UK constitutes a duopoly that needs more competition. Regulators fail to realize that their policies against mergers and acquisitions are causing the anti-competitive harm they also complain about.
Regulators’ distrust of mergers produces especially heinous results for cloud computing, where bigness allows cloud servers to be more efficient than their in-house server alternatives. Cloud computing has a natural tilt toward large firms since cloud computing benefits from economies of scale more than other industries. This means that new entrants into the cloud computing market will need a large amount of startup capital to develop these economies of scale and be competitive.
If not for overbearing regulators unnecessarily stunting their development, the Broadcom-VMware merger can meaningfully compete. If allowed to enter the market the deal could alleviate regulator concerns of overconcentration in the cloud computing market. Ironically, by fighting a war against “market concentration” on all fronts, these regulators are creating problems that can be used to justify further interventions.
Isaac Schick is a policy analyst at the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.