I had lunch with Lance Glasser a couple of weeks ago. He used to run about half of KLA-Tencor’s semiconductor equipment business (and I did some consulting for him back then). We got to discussing why EDA and semiconductor equipment are so different.
At first glance, there are a lot of parallels with EDA. Most notably the same customers, the same technology treadmill and a small number of large companies without a lot of differentiation in their product offerings. But there are big differences. For equipment, the innovation often comes in the big companies, which have shown themselves capable of both developing innovative technology (involving not just optics and hardware but also a huge amount of complex software—60% of the engineers at a typical equipment company are software and algorithms) and also getting that technology successfully into their channel. Big EDA companies are not good at that. Why the difference?
Semiconductor companies know that they need both new equipment for the fab and new design tools for their design groups in order to bring a new process node online. In general, the most advanced fabs (such as Intel or TSMC) work very closely with the equipment vendors on the spec of new equipment and then on ensuring that the equipment works properly in the new environment. If you think it is hard to get your hands on a netlist for a next generation design, try getting your hands on some test wafers when most of the equipment does not yet exist. And when the equipment is ready for production, the fabs have no expectation that they will get it for free in return for this work, though they will certainly drive for deep discounts. As Lance said, sometimes the customers think “JDP” stands for “jumbo discount program.”
One big difference is the way equipment is sold. Of course it is hardware not software, which means that neither the salesperson nor the buyer know the exact incremental cost and so what the profit margin is at any particular price, although Intel actually invests in a “should cost” program to work out what they think a piece of equipment should cost to give them better negotiating leverage.
Another big difference about hardware is that it has lead-time. If you want to open your fab by such-and-such date then the equipment needs to be ordered by a much earlier deadline. This makes the negotiation much more balanced: the equipment vendor can delay knowing that the clock is ticking. Yes, they want the order but the fab absolutely has to close a deal by a given day. The only time a similar situation would exist in EDA is if a big semiconductor company were stupid enough to leave negotiating a new deal until right up to the last day of the old deal when all its existing licenses would expire. Then the EDA company could just delay too. This advantage had decreased in recent years as the customers place a larger percentage of their orders within lead time (to try to transfer the inventory risk to the vendor), but it is still not a bad as with software.
The other difference about equipment is that it really is a one-time buy, a true “permanent license.” You buy a piece of equipment this year and you pay for it this year. Next process generation you don’t “rebuy” all your existing equipment with just a soupcon of new stuff such as better optics. But with software you do. So even though a new piece of equipment may contain a lot of the previous generation in its design, the semiconductor company doesn’t expect to get that bit for free on the basis that they already paid for it in the previous generation.
The way EDA works, even the old days when EDA still had a hardware business model and sold permanent licenses, there was always a debate as to how much of a new product was incremental (thus expected to be included as part of maintenance) or was a new tool (thus required a new permanent license). Today, with time-based licenses, much of a salesperson’s quota may be “re-selling” the existing capability. When so much is riding on just keeping the customer on-board using the existing tools, the salesperson becomes very risk averse about selling new products. Unless the customer insists on buying, it is only a small amount of incremental revenue for possibly a large amount of incremental problems. From the salesperson’s perspective better not to include it in the deal at all. For the EDA company as a whole, in the short term and looking at just that one deal, this is rational. It is only in the longer term and in the aggregate that not getting new products into the channel is a slow death. Equipment companies often structure their sales incentives around penetration, share, and adoption of new products. More insidiously, this style of business (all your money for all your needs satisfied) means that EDA does not attempt to sell to value, does not attempt to increase the meaning of “all your money.” Customer companies, who know the value, make it hard discover for the EDA company. For example, it is hard to find out how heavily individual tools are used. Equipment for 45nm is harder to engineer than it was for 180nm and so everyone expects it might cost more. (It is not all one-sided, EDA companies don’t have to worry about wafer size changes—the equipment industry still hasn’t made back the cost of changing from 200 to 300 mm.)
An equipment salesperson is more like an EDA startup salesperson. If he or she doesn’t sell new equipment, there isn’t anything else to sell. Very little ramping of production goes on except in the latest processes. There is almost no market for new 90nm steppers today, for example (there’s probably a second-hand market though, they used to advertise that sort of thing on billboards along 101 between San Jose and San Francisco).
Little differences in the details seem to have a huge effect of the business. The fact that there is no concept of a software upgrade in equipment, the fact that hardware is solid and has real cost, that it has lead-time, has meant that equipment companies cannot go to zero on pricing, have to increase prices since their costs increase, and have to work closely with early adopters to mature the product. EDA companies have given up trying to sell the value of new products and so have given up trying to grow their customers budgets. So they don’t grow, and EDA is probably smaller than it was five years ago (if we exclude IP).