Lady Windemere’s FAM

In Lady Windemere’s Fan, Oscar Wilde wrote that a cynic is someone who knows the price of everything but the value of nothing. EDA companies are a bit like that. They only know the price of their tools.

How much money does Synopsys make on design compiler? Or Cadence sell of Virtuoso? The answer is that nobody really knows. Not even Synopsys and Cadence.

Of course the finance groups of EDA companies have their way of answering that question. They take the total number of licenses in a deal and add up all the list prices (for the appropriate time periods of course) and arrive at what is typically a very large number. They then take the actual value of the deal and from these two numbers (the deal size and the total value) arrive at a uniform access rate. Essentially they calculate a discount from list price assuming every tool received the same percentage reduction.

EDA companies didn’t really plan this effect. They bundled large portfolios of tools (Cadence called them FAMs for flexible access model) as a way to increase market share, and for a time it was very effective. By the late 1990s, for example, Cadence roughly took in $400M per quarter and dropped $100M to the bottom line. Having difficulty in doing the accounting afterwards was just an unintended consequence.

However, the reason that this doesn’t really work is that the list prices don’t reflect value to the customer. The customer and the sales team don’t really look at them. They think of the deal as delivering a certain design capability for a certain number of engineers, for a certain sum of money. Nobody wastes any time arguing that their Verilog simulation price is too high but they would be prepared to pay a bit more for synthesis, when the answer is going to be a wash in any case. That’s both the strength and the weakness of bundling, or what is often but misleadingly called “all you can eat.”

The biggest problem for EDA companies of this sort of accounting is that they lose price and market signals. Cadence didn’t realize that it was losing its Dracula franchise to Mentor’s Calibre until it was too late, since it never showed up in the numbers. Customers would simply refuse to pay so much for Dracula but the number of licenses in the deal wouldn’t actually get adjusted, so the allocation of the portion of the deal to Dracula hid what was going on.

During the heyday of Synopsys’s Design Compiler in the late 1990s, it was hard for them to know how much revenue to allocate to other products in the deal that might have been riding on its coattails. That’s without even considering the fact that Synopsys would want to spread the revenue out as much as possible to look less like a one-product company to both customers and investors.

This problem is not unique to EDA. I talked to a VP from Oracle that I happened to meet and he told me that they have the same issue. Without getting signals from the market it is very hard to know where they should invest engineering resources. EDA has it slightly easier here since the march of process nodes guides at least some of the investment toward areas that everyone knows are going to become important. Technology as well as price determines the roadmap.

EDA companies fly somewhat blind as a result of all of this. If in every deal Verilog simulation is priced too high, and synthesis is priced too low, then this has implications for how much investment should go into synthesis versus simulation. But if nobody bothers to adjust them in each deal so that the price discrepancy eventually finds its way into the aggregate numbers, then investment will be misallocated. This is good neither for the EDA company nor for the customer, since both benefit from investment being in the places that the customer cares most about, as evidenced by their willingness to pay more for it.

Oscar Wilde is most famous for the play "The Importance of Being Earnest" and also for being incarcerated in Reading gaol after being convicted of gross indecency with other men. Less well-known, he was married and had two children.

This entry was posted in eda industry, marketing. Bookmark the permalink.

Comments are closed.