A quiet revolution in licensing models has emerged within the EDA industry over the past couple of years. EDA companies, or at least those whose shares are publicly traded, now understand that Wall Street likes predictability when it comes to revenues.
EDA licensing traditionally follows a perpetual model, in which users buy a tool license that essentially lasts forever. Along with that perpetual license, vendors typically sell a maintenance deal on an annual basis. The norm is for maintenance to sell for 15% of the original purchase price. Maintenance means technical support, bug fixes, and, sometimes, upgrades.
The problem with the perpetual licensing model, in terms of making EDA companies attractive to investors, is that revenue is recognized up front and vision into the stream is poor. So EDA vendors are switching to a time-based licensing model, where revenue is booked quarterly. Wall Street likes this model better because revenue is more predictable over time.
Moving to a time-based licensing model makes sense in the world of IC design tools, even from a technology standpoint. With semiconductor fabrication technology changing so rapidly, users of IC design tools don't really want licenses in perpetuity. IC design teams must have tools that are geared toward the latest fabrication processes or they'll fall behind.
But for another class of EDA tool vendors, time-based licensing doesn't make much sense at all. Traditionally, it has been known as the "shrink-wrap" market. The classic example of a shrink-wrapped tool is a layout tool for pc boards.
Virtually all buyers of shrink-wrapped software would balk at time-based licensing. For one thing, these tools aren't aimed at some rarefied application, but rather at more of a mainstream market. They're generally sold at a much lower price point than IC design tools. In most designs, the deliberate innovative pace of pc-board technology allows pc-board layout designers to use a tool that may not be the newest.
Additionally, users of shrink-wrapped tools are accustomed to a Microsoft model for obtaining bug fixes. If Microsoft comes up with patches for a problem with MS Office or Windows, it puts together a service pack that's downloadable for free by registered users.
A cautionary tale to this effect can be told by Altium Ltd. About a year ago, this Sydney, Australia-based vendor of tools for pc-board and embedded software design tried to institute a model in which it asked customers to pay for service packs. The hue and cry from customers was loud enough that the company backed off. Service packs for Altium's software, such as its Protel DXP board-level design suite, can once again be downloaded gratis from its Web site.
For its part, Electronics Workbench, another vendor of pc-board design tools, has eschewed charging for maintenance. The company found that offering free support service packs to its customers has led to loyalty. Users are inclined toward repeat purchases and are more likely to pay for major upgrades.
So the bottom line for shrink-wrap EDA tool vendors is not to linearize their revenue streams through either time-based licensing or fee-based maintenance. Instead, these vendors have little choice but to entice customers to upgrade to significant new revisions of their tools. That, combined with a dogged focus on customer service, drives this maturing segment of the EDA industry.