Competing with free EDA software

Chris Anderson (editor of Wired, owner of TED, author of The Long Tail) has a new book called Free coming out in July. One thing that he emphasizes (at least in his articles on the subject, I’ve not seen the book itself) is that “free” is very different from “really cheap.” If you are an Amazon Prime subscriber, whereby you get free 2-day shipping once you’ve paid an annual fee, or if you are an iPhone user whereby you get unlimited data access, you know that this changes your behavior. People instinctively know this when they sign up for monthly gym membership; most people would be better just paying the one-time fee each time they go but they know (or at least hope) that “free” will change their behavior and they will use the gym more.

Websites are increasingly “free,” meaning either that they haven’t yet found a business model, like Twitter; or that they are advertising supported, like EDN or plentyOfFish; or that they don’t attempt to make money on the website and exist for some other reason, like Wikipedia or Moveon.org.

Alternatively, many websites use what has become known as the “freemium” business model. A large part of the website is free, but if you want to get to the best stuff or want more then you have to pay. For example, flickr is free but if you want a lot more storage you have to pay; almost all games have some initial levels free so that you can start playing and only need to pay once you get in deeper.

One challenge in EDA is that the big companies bundle a lot of tools together for a single price, so effectively all of the tools are free (in the same way that going to the gym is free once you’ve paid the subscription). As planned, this makes it hard for small EDA companies to compete. Their tools haveto be so much better that customers will pay for similar tools that they already own.

I had lunch with Paul Estrada (a.k.a. Pi) a couple of weeks ago. He is COO of Berkeley Design Automation (which is obviously located in…Santa Clara). They produce a SPICE-accurate circuit simulator AFS that is 5 to 10 times faster and has higher capacity than the big company SPICE tools. For designers with really big simulations, that is a pretty compelling value proposition (over lunch instead of overnight). But for designers with smaller simulations and access to unlimited big company SPICE simulators, it is harder to convince them to even take a look, never mind open their wallets. However those slow big company simulators still tie up hardware (and circuit simulators are both CPU and memory intensive, so need the good stuff) and they keep expensive designers busy waiting.

So Berkeley recently introduced a block-level SPICE tool, AFS Nano, that sells for only $1,900. This literally saves customers enough in hardware to justify the purchase, even if they have a pile of big company SPICE simulators stacked up on the shelf. Oh yeah, and those expensive designers can get back to work. It is not quite the freemium business model (which would require giving AFS Nano away) but it is close. Like with the other models, Berkeley hopes the near-freemium AFS Nano will get customers interested in their big tools.

Another interesting book is What Would Google Do? by Jeff Jarvis. He examines lots of businesses and wonders what they would look like if you largely gave away everything to make the user experience as good as possible, and then found alternative ways to monetize the business.

EDA software is notoriously price-inelastic. It doesn’t matter how cheap your tool is, it has a relatively small number of potential users. You might steal some from a competitor, but overall the number of customers is not driven by the price of the tools in the same way as, say, iPods. So a free business model is unlikely to work unless there is a strong payment stream from somewhere else such as a semiconductor royalty. There is also a high cost to adoption in terms of training, setting up technology files and so forth meaning even “free” EDA software isn’t really free once you get it into use. So it is unclear what Google would do in the EDA space, other than not enter it since it is too small to be interesting to them.

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