Honey I Shrunk the EDA TAM

Honey I Shrunk the EDA TAM
by Daniel Nenni on 10-19-2018 at 7:00 am

22509-honey_i_shrunk-kids-apple.jpgThe “20 Questions with Wally Rhines” series continues

Throughout the history of the EDA industry, pricing models have caused discontinuities in the way the industry operates. For a variety of competitive reasons, individual companies have developed ways to change the pricing model in an attempt to secure competitive advantage. Following are some of the most memorable:

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  • Valid Logic (1988) – Remove the premium for “global float” and allow all licenses to “float” around the world. This one sounds pretty reasonable in today’s computing server environment but in 1988, software licenses were “node locked”. You purchased a design software license for one work station and it could “float” only within a reasonable distance, say around a single corporate site. Valid Logic offered their customers free float of the license to any of the customer’s worldwide locations through a program called “ACCESS”. It was a big hit. It also destroyed a significant portion of the total available market for EDA software, more than half by some estimates, as other EDA companies followed suit.
  • AVANTI Subscription Licensing – In the mid-1990’s, AVANTI introduced a three-year time-based licensing model. I am told by Daniel Nenni it was driven by AVANTI’s observation that customers purchased perpetual licenses that lasted for about 3 years (two Moore’s Law process nodes) before they had to upgrade and buy new perpetual licenses (although Red Herring magazine reported that Gerry told them he got the idea from car leasing plans). At this time, the industry model was a combination of perpetual licenses plus ongoing maintenance. The maintenance fee was 15-20% annually of the cost of the perpetual license, similar to what most of the non-EDA software industry offers today, except for the more recent introduction of SAAS (software as a service) models. The perpetual license cost was high and the revenue was all recognized “up front” because the customer now owned the software. For the AVANTI three year subscription model, the entire EDA industry followed the example like lemmings because of pressure from customers. It also had an attraction for the EDA companies since it offered a continuing revenue stream and EDA companies were worried about what would happen when perpetual license sales slowed to a smaller percentage of their revenue and maintenance revenue became the primary ongoing revenue source. The problem with the three year subscription model was that competitive discounting quickly drove the subscription price down to about the same level as the previous annual maintenance cost. Now the customers were receiving product plus maintenance for the same cost as they previously paid just for maintenance. A good deal for the customers but questionable for the EDA companies.
  • Cadence FAM (Flexible Access Model) – This was introduced in the late 1990’s. It was essentially a three year “all you can eat” approach to software from a single EDA company. It was a hit with the Cadence sales force and the customers but it caused lots of disruption in the industry although I don’t think other companies offered anything similar. It led to internal management disruption at Cadence. At the Cadence earnings call on April 20, 1999, the company announced that “the company has run into a ‘one to two quarter delay in absorption of 0.18 micron design tools’ among semiconductor makers. Many in the EDA industry translated this as: “A large number of our best customers have purchased three year FAM licenses so we can’t collect additional revenue from them for a while”.
  • Cadence Re-Mix – Once again, Cadence sets the pace of innovation in pricing with the introduction of “Re-Mix”. A customer specifies the mix of software products desired on the date of contract renewal but, if the customer chooses to change the relative mix of one product versus another, he can do so within the limits of the original contract value. Up until this time, customers had to guess what their mix of product needs would be for the next three years. Typically, they had to buy twice as much software as they would use on an ongoing basis because they couldn’t predict the mix of products they would need. The result: By some estimates, this re-mix approach eliminated as much as half of the EDA TAM because customers didn’t have to predict their future mix of needs and didn’t have to buy licenses sufficient for peak usage.
  • Foundry IP libraries – Until the late 1990’s, silicon foundries like TSMC left the entire design process to their customers. TSMC received a verified GDSII file from the customer and they checked it and then generated photomasks, fabricated wafers and shipped parts to the customer. Companies like Artisan were in the business of creating physical libraries of standard cell blocks that were checked for correctness and modeling by being fabricated on a test wafer by the foundry. They were then sold to customers doing the designs to speed design of the standard, undifferentiated parts of their chips. Wouldn’t it be great if customers could have access to the entire Artisan library during the design phase and then only be charged based upon the number of cells that were actually used in their designs multiplied by the number of chips produced? Artisan thought so. And they convinced TSMC to adopt the model, providing software to trace the usage of Artisan cells. Artisan consequently developed a stable stream of royalty revenue from TSMC, making them an attractive acquisition for ARM. I’m told that the deal was not so good for TSMC. High volume customers negotiated discounts to wafer pricing with TSMC and the standard cell libraries became part of those negotiations. As a result, the additional money that TSMC expected to receive from their customers by charging them for the use of standard cells turned out to be elusive. The bundled price of wafers plus photomasks plus IP, etc. was included in the wafer price and any incremental revenue for the cell libraries was hard to find.

    How can I be so cavalier about this whole topic when, during the last twenty-five years as CEO of Mentor, my company was subjected to so much cost and revenue pressure by these model changes? The reason can be seen in my previous blog EDA Cost and Pricing on October 12[SUP]th[/SUP]. The revenue of the EDA industry has continued to be 2% of semiconductor revenue for more than twenty years. These model changes were simply part of the way that discounts were provided to customers so that the EDA companies could stay on the learning curve and give semiconductor companies a reduced cost per transistor for design software. If the pricing models hadn’t changed, we would have had to provide those discounts in some other form because the EDA industry had to reduce its software price per transistor at the same rate that the semiconductor reduced its revenue per transistor.

    The 20 Questions with Wally Rhines Series