Why The Early Edition Was Late

By Mike Gianfagna
I was a little late with the Early Edition this month. This is kind of embarrassing given the name. Anyone in EDA sales will understand why. It’s the end of the quarter, about a week to go. I’ve been really, really busy. Many EDA companies will book more than 50% of the quarter’s business in the next week. The bean counters have a name for this phenomenon:

the hockey stick. For some, it can be unnerving. Non–uniform book of business, characterized by a spectacular rise in deals closing near the end of the quarter. Every EDA company sees it from time to time. But that’s not the topic of this blog. Rather, it’s what’s behind the hockey stick. Much has been written about the fact that EDA software doesn’t get monetized correctly. It’s an industry that in some very real ways makes the semiconductor business possible. Yet the size of EDA is in the neighborhood of two orders of magnitude smaller than the semi business it supports. This seems odd. What causes such a disparity? I propose this phenomenon is caused by the Original Sin of our industry.

Over the years, I have agreed and disagreed with things EDA industry analyst Gary Smith has said. A few years back he came up with a gem of a comment. Paraphrasing, he pointed out that the EDA industry is, at its root, an outsourcing business. That is, EDA started as a captive business inside some of the larger IDMs and vertically integrated companies—Bell Labs, Texas Instruments, RCA, General Electric, National Semi and IBM, to name a few. All had fairly large internal CAD development teams.

In the early 1980’s, some of the developers from these companies set up shop as independent software suppliers. Daisy, Mentor and Valid are the “famous” ones from that era. Only one remains today. Consider the sales cycle in those early days of EDA. The person that used to develop software for a particular IDM now comes through the front door to sell commercial software tools to their prior employer. The person sitting across the table from them used to be their internal customer. They are now their (potential) external customer. That person knows exactly what it will take to develop the software being sold. They watched it at close range for many years.

The prospect of getting these tools from an external supplier does have advantages. Lower cost of ownership, exchanging fixed cost for variable cost, amortization of development over a larger user base, etc. So, these early and very educated customers calculate the cost of internal development and offer just a slight premium over that cost to the new EDA vendor. And the EDA vendor takes that deal. That’s the Original Sin. At that moment, the EDA vendor had a choice. They could have positioned the value of the software relative to the business they were creating for their customer. You can’t tape out a chip without EDA tools, and no tape outs means no business. Or, you could just take the low hanging fruit represented by the cost-based deal, and not push for the value-based deal. The early vendors chose incorrectly, and we’ve been trying to fix it ever since.

I’ve always felt like selling EDA tools was akin to selling cars to master mechanics. The customers could do it themselves. They have the know-how, but maybe not the time. So how important is your product? Do you sell the value of the working car today, or do you succumb to the argument that the master mechanic could build the same car anytime they wanted? Assuming they had the time, resources and inclination to do so.

I would like to propose a hypothetical scenario. My question is directed at EDA tool users, not developers. Let’s assume for a moment that antitrust laws don’t exist. Further, let’s assume that the CAD Cartel meets every six months and fixes the price for all EDA tools, worldwide. Those numbers are, say, 5X the current cost of EDA tools and there is no discounting. In this hypothetical world, what do you do? Do you pay 5X what you are currently paying, or do you re-start internal development in your company? Carefully think about the real, burdened cost for that effort and how long it will take to bear fruit. Remember, you can’t sell the resultant software externally because of the CAD Cartel – they are very powerful.

There is a cost factor that makes it compelling to do it yourself. Is it 5X, larger or smaller? I think this is an interesting discussion. None of this will ever happen in the world as we know it, so don’t let reality creep in (too much).