For communicating between VMs, what is the difference between the 'Custom' and 'LAN Segments' networking options in VMWare 8?
The documentation is not clear.
Does one of them have any advantage over the other? If not, why do they exist?
VMware uses the concept of virtual networks, often identified on the host as vmnet0-vmnet9 (there can be different numbers of vmnets depeding on which version and exact VMware product you are using). By default Workstation sets up vmnet0 as a bridged network, vmnet1 as host-only and vmnet8 as NAT. When you select "bridged", "host-only", or "NAT" for a given virtual adapter, VMware is really selecting vmnet0, vmnet1, or vmnet8 for you behind the scenes.
A user can configure other vmnets, with whatever properties he wants. Let's say you create a vmnet2 with host-only properties. When you select the "Custom" network type, you get a dropdown that lets you pick the exact vmnet you want. You could select vmnet2, or you could select vmnet0 and get the default bridged network behavior.
"LAN Segments" are a hold over from the Teams feature that was in WS 5 - WS 7.x. LAN Segments function a lot like a new host-only vmnet, but without a DHCP server configured. The idea is to give an upgrade path for Teams created in a previous version of the product.
You could simulate the effect of a LAN Segment with your own custom vmnet if you wanted to, but people familiar with Teams might like to use the LAN Segment setting.