Business models are really important. Just ask any internet startup company that has lots of users and is trying to work out how to monetize them. It is a lot easier to get people to use something for free, much harder to get people to pay for something, especially when they don't value it much. Different companies that look somewhat similar often have very different business models. HBO versus Network TV I was once sat on a plane next to an executive from HBO. This was in the Sex in the City and The Sopranos era. I asked him how come HBO made programs that were so much higher quality than CBS, ABC, NBC and Fox. He said that although it looked like they were in the same business, making programs for TV, in fact their business models were totally different. The big networks sold eyeballs to advertisers, the more eyeballs, the higher the price. So they wanted to make lowest common denominator programs that appealed to as wide a range of people as possible. On the other hand, HBO got paid by subscriber. If you subscribed to HBO for a month, then they got $3 or whatever the number was. And here is what he pointed out that I'd never thought of. They didn't care if you liked Sex in the City as long as you liked The Sopranos enough that you were not going to drop HBO. A mostly different demographic loved Sex in the City and never watched The Sopranos. But they were not going to drop HBO because they needed their Sex in the City fix every week. So it was important to make a few really high-quality programs that together covered all interests, but it was irrelevant if you liked them all. It is almost as if HBO is wasting effort if you like too many of their programs, they get paid the same if you only like one, provided you like it enough to keep signed up. I am sure today there are many people who would never drop HBO because Westworld is starting its new season. Or Game of Thrones will be back eventually. Or who love John Oliver's show. Or one of the other ones. In the streaming era, this is perhaps even more obvious. Netflix and Amazon have thousands of shows you can watch, yet they make some of their own original content. Since you can only get the original content if you subscribe, obviously, then if the shows are good enough that will drive subscriptions, even if a lot of what you watch is also available on other platforms. Once business models are set, it is very hard to change them. HBO is facing this today, wondering how to best get money from millennials who typically don't bother with cable. If they switch to pure internet, they risk losing all those $3s from people who don't watch stuff on the internet (or better still, who pay for HBO as part of a bundle but don't even watch it). They have HBO GO which allows people who have a cable subscription to HBO to stream their content freely. And they have HBO NOW for people who want to pay a monthly subscription to stream HBO to their phone (or Apple TV, Roku etc) without having a cable subscription. EDA Business Model Evolution When EDA started it was in the era when there were no separate hardware and software industries. The first wave of EDA was Calma, Applicon, and Computervision. They would sell you the hardware with the software already installed. For example, the Calma Graphic Design System (or GDS) was a re-badged Data General minicomputer. You paid a single price to license the hardware and the software in the same way that if you buy a digital camera you don't pay for the software separately. Hardware was sold as an up-front purchase price and then an annual maintenance of around 15-20% of the original price. That covered the hardware and the software maintenance. As an aside, if that GDS name seems familiar, it is indeed the same GDS as in the layout interchange format GDS II. See Why Do Layout Designers Say Stream Out? for that story. In the mid-1980s things started to change. It is funny to look back on now, but we were genuinely worried back then whether people would pay more for software than they did for the hardware it ran on. After all, they never had before. That fear turned out to be unfounded. Initially, expensive software was sold with hardware on which to run it. The DMV sold proprietary hardware in the case of Daisy and Valid, or rebadged Apollo workstations in the case of Mentor. Sun workstations came on the scene, and other offerings from HP and IBM. Everyone already had a VAX. So over time the software got unbundled. But for years the business model continued to be what it had always been: pay an upfront license fee, and then a maintenance fee of 15-20% per year. During the fast growth early days of EDA this was very convenient for the EDA companies because it front-loaded the revenue needed to grow and fund R&D, but still left a sort of royalty stream going in the future years. Two things changed, both at Cadence. Tom Kat did what seems to be the first all-you-can-eat deal with NEC. I believe it was Gerry Hsu, then still at Cadence, who first started to switch users to 3-year deals, having noticed that people seemed to like to lease cars so they got a new one every three years. These two ideas got combined into three-year all-you-can-eat deals that Cadence called FAMs (for flexible access model, since some amount of remixing license was also permitted). The FAM still was front-loaded (technically they were three-year licenses with maintenance). The final transition was to three-year ratable licenses, structured as leases so that the revenue (both license and maintenance) was recognized monthly over the period of the deal. That business model transition was not entirely smooth, they never seem to be. EDA companies had to give up front-loading their revenue recognition and the resulting drop in revenue for a couple of years was painful. In EDA, as a rule, you make money with software that runs for a long time (like static timing or P&R) or that people sit in front of all day (like layout). This naturally creates a reasonable license demand. Other software suffers from what I call the "Intel only needs one copy" problem. If it runs fast then a single copy can be shared around a large organization. Since they are probably not going to pay a seven-figure sum for the license, this creates a problem as to how to grow revenue. If one copy serves a huge number of users, it is hard to transform the beach-head of a single copy into true proliferation. When this has happened in EDA various things have been tried: per-tapeout fees, per-named-user fees, royalties on the chips, bundling products together. But these all have the problem that it is hard to change a business model. Users expect to pay a normal floating license. Anything else will risk the sale at worst, and delay it at best. The whole industry is now in a mode where deals are done for a 2-3 year period and the revenue is recognized monthly over the period. This gives a lot of predictability since over 90% of a quarter's revenue is coming out of the previous backlog. The one part of the business that still has a hardware business model is emulation (and FPGA prototyping, but let's just use the word emulation to cover both here). But that is because it is hardware. Even if the EDA companies wanted to recognize the revenue over 3 years, GAAP will not let them. The second the hardware leaves the dock, the price drops from booking to revenue. Inevitably this makes emulation revenue lumpy and less predictable than software. Just like EDA used to be in the early days. In fact, given how much is coming out of backlog, when guidance for the following quarter is given in an earnings call it is largely about how much emulation business they expect to ship next quarter. Cloud The next business model transition in EDA is almost certainly going to be some sort of way of delivering tools in the cloud. So...watch this space...and visit The Design Infrastructure Alley at DAC. I'll say more about how the Alley came about next week. Sign up for Sunday Brunch, the weekly Breakfast Bytes email.![]()
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