Can the EDA Industry thrive on its own?
Here’s a MasterCard moment – Here are a few other numbers to consider. The market capitalization of the four main public EDA industries that makes up the 4 billion in sales is approximately $10 billion US dollars. The market capitalization of Oracle ($11 billion is sales last year) is about $64 billion. This bothers me – and it should bother you. To my fellow-EDA citizens, whom I have already offended by stating simple facts, this would be a good time to stop reading my tirade. To the rest who remain curious about what I am up to here, I welcome you to hear what I have to say. I am deeply concerned about the valuation of the EDA industry. Why is it so low? If we go by the fundamentals that drive up any industry’s valuation, it would seem that the EDA industry is not considered a growth industry anymore. Even when the industries we closely work with (design houses, manufacturers) grow in market capitalization, the EDA industry does not share this growth. The facts point to a service-oriented industry. Consider – we have a year-to-year growth rate of 2-3%. Stock prices have been stagnant. We don’t experience the upside experienced by related and similar industries. Is it time to tell my 7-year old that Mommy works Retail? Low valuation of an industry can have very detrimental long-term effects. It is only a matter of time before talented newcomers will show a strong preference for entering other high-growth industries. Experienced individuals may leave existing established companies to go to an EDA start-up (where there is, thankfully, still some money to be made). A widespread exodus is not imminent – but not impossible. To be sure, there are questions. Are we doing the right things to ensure future growth? Is this a temporary setback? Why are we settling for such low numbers? Is the only way to hit it big here by joining or founding a start-up? Why are there no news stories on how "1 in 5 employees" in Cadence is a millionaire? The funny thing is, we hear about new products in EDA all the time. If I had a dollar for the number of times I have heard EDA being heralded as "innovative", I would be a very rich woman. One has to ask – are we confusing innovation with engineering? Would you consider the Golden Gate Bridge an engineering marvel, or an innovative solution to getting to the other side? A wireless lifestyle is innovative, but would you call tools used to build the wireless products innovative in the grand scheme of things? Lets face it – EDA is a "behind-the-scenes" industry. We need to start acting like one. I have often been told that our industry is "too small". I can understand that, but I don’t think it's an answer – it's an observation. I am part of an industry that is integral to chip design – why is it not as valued as the chip design process itself? I have been thinking of two ways in which we can change our operation model. I think Peggy Aycinena was thinking along the same lines when she wrote her editorial on Cadence and TSMC. Indeed, why not? All chips will find their way to foundries – perhaps the best location for our industry is within a foundry itself. What if the "reference flows" created by the foundries consisted of software wholly owned by them? It is not unheard of to have companies that have both a software and service component. Once we (grudgingly?) acknowledge that the FPGA vendors had it right all along, I am sure we will see a more dynamic landscape. There has always been talk about using different licensing models to increase the industry’s earning potential, and there have been some significant changes. We went from perpetual, to time-based, to pay-as-you-go. I have heard many industry luminaries talk about how product licensing can be highly lucrative if it's tied to the profitability of the final product. This type of "royalty-based" model can be a tremendous shot in the arm – imagine the fortunes of an EDA company that would have participated in the development of the Apple iPod under this model. Doesn’t it make you wonder? Lets understand why the royalty-based model does not work in EDA. I think it is because given a choice, end-users will always prefer to go with traditional licensing models (time-based or perpetual). It’s a no-brainer – you do the math. Consider also why foundries do not need to worry about this issue – where do you go for more chips if your chips become popular? The royalty-based model is inherent in the relationship between a design house and the foundry. My other suggestion? I think the industry can work towards going private. This way, vendors don’t have to make deals just so that they make the quarter’s numbers. We can charge the right value for our tools, and ensure all-round wealth through other profit sharing mechanisms. Price gouging and deep-discounting is wiping out our profit margins. I can attest to the fact that EDA users are smart users; they will always want to buy the tool that works best in their environment. If you can show value, you will sell your product. Think about it – no last minute deals, no need to ask for favors and no fat sales commissions. Welcome to EDA-topia. For long-term growth, the Foundries, EDA Companies, DSP/C/Embedded Companies, IP Providers and Design Services Providers should consolidate their services. This way, we can offer complete and critical solutions, and be proud of our collective prominence in the global chip industry. I hope I leave you concerned with some of issues I have discussed here. Let's first acknowledge that the industry’s valuation is a problem. Then in true EDA fashion, let's fix it. ************************
Sashi Obilisetty is President & CEO of VeriEZ Solutions, Inc. – an EDA company based in Santa Clara, CA. She can be reached at sashi@veriez.com
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