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