There used to be a healthy EDA world. A few years ago, there were: many EDA journalists; Gartner covered EDA; the large Wall Street firms all had analysts covering EDA; many venture capitalists invested in EDA startups; and every quarter, a startup would go public or be acquired for an attractive valuation. EDA was democratizing semiconductor design, pushing it out from its heartland within the large semiconductor companies themselves into system companies, fabless startups and design houses. Life was good. The industry was profitable.

The world's $3 trillion dollar electronics industry is largely dependent on the world's $400 billion dollar semiconductor industry which, in turn, is dependent on EDA, a tiny five billion dollar industry. EDA technology is a requirement for this value chain. But the EDA industry, as currently structured, might not continue to be the place that continues to provide it.

There is a tragedy of the commons with respect to money flowing from semiconductor companies into EDA. Overall, semiconductor companies require EDA to be well-funded. But it is in the interest of each semiconductor company to negotiate the lowest possible cost for its own EDA purchases, hoping and assuming that other semiconductor companies will take up the slack and pump enough money into EDA to keep the innovation engine running.

That doesn't seem to be happening. With hiring freezes and large layoffs, the big EDA companies are going to be underpowered on innovation. Further, with official and not so official policies against acquisition of startups, venture capitalists have largely exited the industry, looking for more attractive rates of return elsewhere, and so the flow of small companies is running dry.

Part of the reason that EDA is sick because it is sailing into a strong headwind. Chip design starts are falling and semiconductor R&D budgets are under pressure.

EDA companies like to believe that product companies want to design chips to achieve differentiation. While it is true that product companies want to achieve differentiation, designing a chip is the last resort. Nothing is more costly or more risky. Differentiation is increasingly in software and design.

Look at the original iPhone. All the differentiation is in Apple's software, industrial design and branding. Nobody cared about the silicon, mainly an old baseband chip from Infineon that had already been superseded. Ten years ago, Apple would have had to build some chips to get out a product like that. To do that, it would have had to buy lots of design tools. Nokia used to design lots of chips, now it lets ST and Broadcom do all the heavy lifting and ST already has all the tools it needs.

Innovation in EDA occurred mainly in startups. This is just a statistical fact. If 30 design-for-X projects are kicked off, a few in big companies and most in startups, it is numerically most likely that the one that wins and achieves market traction comes from a startup, not the internal projects. As the largest company at the time, Cadence's deliberate killing off of the startup ecosystem to focus on internal development didn't just hurt Cadence when its internal development failed to produce. It hurt the entire industry since it drove away the VCs who would otherwise have funded more startups, which in turn meant that the innovation hasn't been done at all.

So what is likely to change? One scenario that is clearly not going to happen is that the world's electronic industry stands around and waits for EDA to get its house in order. One company alone, TSMC, makes so much of the world's leading-edge silicon that it alone suffers hugely if tapeouts of chips slow up due to lack of new technology in EDA and the cost of one of its fabs is more than the market cap of the entire EDA industry.

For EDA to get healthy, there are several possible scenarios:

• EDA can be structured like it used to be, with a few big healthy companies and a thriving ecosystem of small startups that serve as technology incubators. For this to happen, prices will need to increase which could happen by changes in business models, or by the natural increase in pricing power that will accrue to Synopsys if Cadence doesn't recover. Or,
• EDA can become part of a larger industry, say, mechanical design or enterprise software. Or,
• design can return to being done internally in the semiconductor companies as it was in the early 1980s and still largely is within Intel and IBM, perhaps jump-started by some acquisitions. TSMC acquiring Synopsys anyone?
• Finally, perhaps a consortium of semiconductor companies can start a new EDA company to serve their needs, much as SDA (now Cadence) was originally funded. Full circle.

About the Author:

Paul McLellan is a turnaround CEO, marketing expert in EDA and semiconductor industries. Most recently, he was CEO of Envis.