September 03, 2007
Are EDA Companies Getting Fair Value for their Software?
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Jack Horgan - Contributing Editor

by Jack Horgan - Contributing Editor
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Anything to add?

The value of doing optimization versus analysis. When we acquired Aprio, someone inquired “What is the exit strategy for a company like Blaze?” I said that there is room for one independent DFM company that exploits what we call electrical DFM which is really the parametric yield issue. We made one acquisition with Aprio. We are probably going to look at other things. We definitely intend to become this aggregator that is the independent DFM company. We will do that by running faster than every one else and being smart about what we make ourselves and what we acquire.

That can be a challenge because VCs have limited patience on how long they will wait to get their desired return on investment times 5.

As I said we are in a unique position to say that we are not going to take more money in order to become profitable. The key to that is maximizing growth here.


Over the last few months most of us have seen a drop in the fair market value of our greatest financial asset, our home, for reasons related to subprime mortgage market rather than anything to do with our particular house. Home Depot saw the sale price of its construction-supply business to a private equity consortium drop by around $2 billion because of difficulty raising capital. In the past we have witnessed precipitous drop in stock prices with the bust and with the Enron scandal. This should call into question the real value of just about everything.

We live in a capitalist economy where the fair market price, the value, of a product or service is what a willing buyer and a willing seller freely negotiate. Before signing the final agreement the seller is free to seek other buyers and the buyer is free to seek other suppliers. Either party may decide to simply wait. Synopsys paid a $10 million termination fee to walk away from acquisition agreement with MoSys. With this definition the question of the value of EDA products or anything else for that matter is largely moot. Nevertheless, we shall go on.

When buying or selling a house, your realtor will look at comparable prices to set proper expectations. If a house in the neighborhood recently sold for X, the seller will not sell for much less than that amount nor will the buyer pay much more than that amount regardless of the reasons behind the price; a foreclosure or a seller needing cash quickly on the one hand or a buyer from another state or country where prices are much higher. Oregonian buyers are always complaining about Californians who move into their state and drive up housing prices.

The primary purpose of a watch is to tell time. I have a $30 watch. It has kept pretty good time for many years needing only a $5 battery. I am sure that readers have or know someone that has spent 10 times, even 100 times as much for a watch. Perhaps they saw additional value in the watch as jewelry or as a status symbol (think Rolex). The same logic explains why some prefer BMWs and Mercedes while others buy a Hyundai. Different buyers will perceive different value in the same or similar items or between different items in the same general category.

Some companies may use a lower price to gain market share or improve stock price. Some companies may sell a product at a lower price as a loss leader, to get higher margin add-ons or service contracts, to gain endorsement from influential customers, to prevent a competitor from gaining a foothold with one’s existing customers … In the old days Gillette gave away the razor and made money on the razor blades. Today cell phone carriers give away or heavily discount cell phones to get service subscriptions.

In the early days of MCAD when systems sold for over $100K a seat, salesmen had spreadsheets showing ROI based upon full ownership costs but with fewer personnel. In reality few designers or draftsmen were let go. Today productivity tools are promoted more on the basis of time-to-market and better end products rather than the savings from personnel reductions. This is easy to understand in the abstract but more difficult to quantify in the particular.

The above paragraphs provide some of the ways and some of the reasons why price fluctuates from the nominal value due to circumstances.

It is hard to imagine design and manufacturing an IC without EDA software. It is equally hard to imagine electronics products (consumer, automotive, military, …) with today’s functionality and price point without ICs. Nuts and bolts are needed to keep a car together but the contribution of EDA software to the design and manufacture of ICs goes well beyond that as a fundamental enabler. The inverted pyramid below shows the not-to-scale relationship between the 2006 global revenues of the EDA industry, the semiconductor industry and the electronics industry. Market size estimates are given at the end of this article.

Given this comparison it is easy to be sympathetic to the claim that EDA firms have received the short end of the bargain although it is nevertheless a bargain. On the day I am writing this article the market capitalizations of the three leading EDA firms are Mentor Graphics $1.2 billion, Synopsys $3.85 billion and Cadence $5.78 billion. Not too shabby.

It is hard for any industry to change its basic pricing model. However, the EDA industry has moved in recent years from perpetual license to time based license and subscriptions. SIP firms have had success with a combination of licensing fees and royalties. The industry might be willing to consider new pricing innovations.

Most people would acknowledge that the reward should be proportional to the risk. It cost around $5 billion to construct a fab. By contrast Mr. Jacobson says that Blaze can reach profitability even within the traditional EDA model with a total investment of under $20 million.

In fairness to Mr. Jacobson he is not arguing about the derived value of EDA software in general but the value of a very specific program that will significantly and measurably improve parametric yield. Time will tell whether he can discover a way to get the derived value he seeks.

Some Market Size Estimates for 2006:

According to EDAC (Electronics Design Automation Consortium) EDA revenue was $5.274 billion.

According to SEMI the capital equipment expenditures for semiconductor manufacturers was $40 billion.

According to the World Semiconductor Trade Statistics (WSTS) the global semiconductor market was $247 billion. According to FSA (Fabless Semiconductor Association) there are ~1,350 fabless companies with revenue of $49.7 billion, which equated to 20 percent of the semiconductor sales. According to Electronic Business and to iSuppli the top 25 Semiconductor Manufacturers had revenues of around $190 billion.

According to Consumer Electronics Association (CEA) factory-to-dealer sales of consumer electronics are projected to exceed $155 billion in 2007 or seven percent growth from the $145 billion in 2006.

The world OEM automotive electronics industry was $86.5 billion

The US electronic display market in 2006 was $11 billion

The top articles over the last two weeks as determined by the number of readers were:

New Kit From Cadence Cuts Risk and Time for Adopting Functional Verification Methodology  The kit provides complete example verification plans, transaction-level and cycle-accurate models, design and verification IP, scripts and libraries -- all proven on a wireless segment representative design and delivered through applicability consulting.

The SoC Functional Verification Kit includes design and verification IP from Cadence and third parties, including an accurate high-speed model of the ARM968E-S™ processor, AMBA® PrimeCell IP® including interconnect and peripherals, and the ARM® RealView® Development Suite debugger, USB 2.0 from ChipIdea, and 802.11 from WiPro. The kit includes three main flows: architectural, RTL block to chip, and system-level. Users can implement the entire kit as an integrated flow, or may select flows individually. Also included are 13 workshop modules and over 40 hands-on labs which engineers can use to incrementally improve their verification productivity.

You can find the full EDACafe event calendar here.

To read more news, click here.

-- Jack Horgan, Contributing Editor.

Review Article
  • Are they really willing to change? September 04, 2007
    Reviewed by 'r36579'
    Certainly there is some talk about value-based pricing for some time now, especially in the area of DFM where such tools should apparently save millions or even billions.
    Here the opportunity of value-based pricing is again discussed but finally a traditional EDA model is being applied to sell the software. So why settle again for the traditional?
    o Because it is more predictable short-term satisfying analysts and shareholders?
    o Value-based models are not accepted foremost by the users, but also analysts, shareholder?
    You state:
    "[...] It is hard for any industry to change its basic pricing model. However, the EDA industry has moved in recent years from perpetual license to time based license and subscriptions. SIP firms have had success with a combination of licensing fees and royalties. The industry might be willing to consider new pricing innovations. [...]"
    New pricing innovations?
    What does this mean? We already see higher prices, segmentation, no more volume bundling of all products by large vendors, debit card principles,...
    But is this really new? Or does it look more like variations of the established TBL, commitment, backlog principles?
    Really new would be value-based models with shared risk/ reward! Success components! Flexible volumes!
    While it fluctuates heavily the IC industry outgrows the EDA industry. Yes, it seems like a more risky investment but has shown traditionally higher returns that the stable, slow growth, (for analysts) very predictable EDA industry.
    Are EDA companies really willing to entertain really new business models? New ways of working with their customers to realize and demonstrate value on the product level? Tapping into new sources of incoming streams other than license/ consulting sales? Establishing some solution orientation?
    Is there an infliction point that has to happen before these models can change? If yes, which one? Maybe a new generation of EDA leaders which are not stuck in old ways of doing things? Less influence by VCs and serial entrepeneurs who look more towards cash than to solve the problems of EDA customers?
    Right now the EDA industry rather seems determined to capitalize by all means possible on the increased R&D spendings of the IC industry. Like a leech.
    The EDA business/ market is increasing, alright. But at what hidden "cost" to his user base? Are they all 'satisfied' with this new 'hunger'/ demand of the EDA industry to ferociously grow since the IC industry grows?
    I would think that the current EDA accounting principles and the analyst expectations for predictable and long-term growth as well as the short-term expectations to capitalize on the increasing IC R&D budgets are creating a tremendous innovation bottleneck in terms of new models! And therefore cutting off new possible streams of income such as value-based models, success components.
    The cited move from perpetual to TBL licenses was a concerted effort by both the EDA industry and the EDA users.
    It is now time to sit together again to think about the next new model change.

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