One + One = ??? - What Would You Pay?

One of the shortest but most relevant exchanges during the Cadence analyst call concerning the Mentor acquisition was an exchange between Sterling Autry of JP Morgan and Kevin Palatnik, CFO of Cadence.

About 27 minutes into the conference call, Sterling Autry asked why Cadence was estimating only $50M in operating income benefit considering Mentor’s operating income in 2007 was $120M. Indeed, $1.6B to acquire $50M in income seems like a poor deal indeed.

Kevin Palatnik’s response included the following, “the industry has had a history, from a customer perspective, of trying to get more and include features and not pay for it. So I think we just have to be able to demonstrate value to the customers. So I think, in the short term, I think, there is always the customers asking for the combination and not paying for it.”

The crux of the issue is simple math: 1 + 1 = ??? …how much will Cadence-Mentor be able to charge for their combined products?  If  1+1 > 1.5, then the combined company will be in pretty good shape.  If 1 + 1 < 1.5, then it will be difficult to “extract the value” of the acquisition. In that case, expect lots of layoffs, products being scrapped, and products being sold off.

From my experience, Kevin Palatnik is only partially correct that “the industry has had a history, from a customer perspective, of trying to get more and include features and not pay for it”. When I started with Synopsys in 1992, their flagship tool was Design Compiler. Synopsys added new features and voila…DC-Expert.  Then DC-Ultra. Now DC-Graphical. Each one sold at a premium to the predecessor and customers would pay for the upgrades.

But not without voicing their displeasure, both privately and also publicly on places like ESNUG. It often seemed arbitrary and self-serving to customers what Synopsys deemed an “update” (covered by their tool support) and what they deemed an “upgrade”.  And they felt they were being nickel-and-dimed.

On the other hand, people need to eat, and the EDA tool developers are no exception. They do not work for free. It seems unique to the EDA industry, that customers expect, once they buy a tool, to get any and all improvements to the product for free. This is not the case when I buy MS Office or most any other desktop application, but it is definitely a reality in EDA.

To add to the confusion, I can now download almost any desktop application I need for free as open-source (e.g. Open Office), or use it for free online (e.g. Google Docs), and get access to upgrades for free as well. This has changed customer expectations dramatically.

I’d like to know what you (EDA vendors and customers) think about this:

  1. Should customers pay more for EDA tool enhancements or should they be part of the tool “support”?
  2. How do you decide what is an “update” and what is an “upgrade”?

harry the ASIC guy

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2 Responses to “One + One = ??? - What Would You Pay?”

  1. John Eaton Says:

    I’d like to know what you (EDA vendors and customers) think about this:

    1. Should customers pay more for EDA tool enhancements or should they be part of the tool “support”?
    2. How do you decide what is an “update” and what is an “upgrade”?

    Harry,

    Tool support covers a lot of ground. If the customer wants to have the support engineer read the manuals to him then you should charge for that. You shouldn’t charge the customer when they find bugs in the tools.
    You should charge for training and adding new features but you should not charge for supporting new operating systems when you drop support for old ones.

    John Eaton

  2. Lou Covey Says:

    I wonder wear this attitude of entitlement actually began? The entire electronic design industry seems bathed in it.

    As a die-hard mac user, I’m well versed in the concepts of upgrades versus updates, features vs. bug fixes. Whenever Apple has an update, its generally to fix an inadequacy or a failure of some sort. I pay for support when I can’t find an answer through the extensive information database or through my network of Apple users. And when there is a real upgrade , I know enough to wait a few months until everything is broken in before making the change.

    But in EDA, the vendors sell the product before its ready, because the customers demand it before it’s ready and everyone complains because nothing works the way it should and costs more than it’s “supposed” to.

    EDA vendors should fix problems in their tools on their dime. EDA customers should pay for changes that they ask for. EDA vendors should LISTEN to their customers and give them products they request, and the customers should pay when the vendors respond appropriately. And any new, unasked for feature should be bullet-proofed, adequately explained and supported by the vendors.

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