A tough crowd as Cadence played Boulevard

By Tom Foremski - July 19, 2005

By Tom Foremski for SiliconValleyWatcher

Cadence Design Systems is probably one of the largest software companies you've never heard about. Only because they do the work of creating software that is used to design chips of all kinds, and the motherboards they sit upon.

Cadence has never been able to gain much limelight but Mike Fister, the former senior Intel exec now running the company, hopes to change that. And judging by the performance of Mr Fister and his team Monday evening, he might be able to do it. Cadence started looking pretty good as the evening wore on. [And it was more than just the slightly disorienting effect of ingesting the delights of Boulevard's kitchens and cellars.]

Mike Fister and two of his top executives hosted a media round table Monday evening on three tables and they switched places after each dinner course. (BTW, Mercora should take note :-)

Tough questions

Cadence invited a mainstream establishment media crowd to the event, which normally means they would face simple questions about chips and the design cycles. But on Monday they walked into a lion's den of sorts, and barely were able to take a bite of their dinner as they took on some tough questions from a tough crowd.

On my table, there was Cliff Edwards from BusinessWeek, well versed in this space, and Chris Kraeuter, senior reporter from TheStreet.com, who has covered this space on a daily basis. I've had the fortune of covering the chip industry for more than 20 years, and I love the drama of its rags-to-riches cycles. I can discuss about dielectric materials and the economics of the industry all night long — but I couldn't keep a friend if I did.

At the other table is Don Clark, deputy bureau chief from the Wall Street Journal, and Dean Takahashi, former WSJ, Red Herring and now San Jose Mercury News. Don and Dean are both hardcore chip reporters, they have been studying and reporting on the industry longer than they've known their children. So I think you get my point. It was a tough crowd that night.

Sucker punch deflected

But I have to hand it to Cadence. Mr Fister has gotten everybody on message that Cadence wants to be the number one supplier of chip and motherboard design software services, for every industry and vertical.

And it offers tool sets for each vertical that combine many chip design tools into one integrated system. It saves customers from having to figure out the tools integration themselves, thus faster time to market. [BTW, if Cadence could also integrate the IP licensing into one license package it will own the market.]

Mr Fister also had some interesting answers to some thorny questions. For example, at one point Mr Fister said Cadence was the largest, or second largest, in every one of its markets, and that there were only one or two other small, insignificant competitors.

But surely this lack of competition is bad for the industry as a whole, I asked? "The lack of competition in this case, creates an enormous amount of innovation. Because now, you don't need to integrate dozens of design tools to create an advanced chip. Whatever your sector, whether automotive or wireless, we've done it for you." Cadence thus becomes a design platform on which many thousands of chip designers can use to innovate new chips.

Fair enough, provided Cadence doesn't exploit such a dominant position. And I do think there is a new paradigm evolving, an understanding that companies want their suppliers to do well and prosper - just not to get filthy rich and arrogant and deliver little ongoing value.

[BTW, that is part of the paradigm of the future, your customers will decide just how much they will allow you to profit — so you'd better be nice.]

The culture of Silicon Valley

We grilled Mr Fister's colleagues, James Miller, senior VP of Development, and Aki Fujimura, CTO. Mr Miller worked for many years with Mr Fister at Intel, and it is typical that you bring your foxhole-buddies with you.

Mr Fujimura is a intersting person, Japanese, he was thirteen when he arrived in the US. His father is a famous researcher in speech recognition technologies. Mr Fujimura founded and sold two companies to Cadence, and he is an entrepreneur in the classic Silicon Valley style—he keeps coming back to do it again.

Mr Fujimura and many others here, no matter from which culture they emerged, share a characteristic that is rarely found elsewhere. These people like to build small companies into large ones, they want to work on big ideas. And when they hit the jackpot, they don't disappear onto a yacht and villas on the Mediterranean, as Euro entrepeneurs do. They pump their capital and their expertise back into the ecology of this place.

Two issues

So, getting back to Cadence, the two issues need a bit of work:

1) Diminishing numbers of customers. Consolidation at the top, and the high volumes required to make leading-edge chips viable, mean there are a small number of large companies. That leads to smaller license revenue—unless you can switch business models fast enough to a services-based model.

Also, can small, fabless chip companies survive/prosper against large integrators such as Broadcom that can offer one-stop chipset solutions? If they can't survive, that means fewer Cadence customers.

2) Acquisition target. Mr Fister said he did not worry or think about becoming an acquisition target by a large chip foundry, such as maybe TSMC, the world's largest and also a Cadence business partner.

Yet the economics within the chip industry favor such a scenario, as low margins force the foundries to absorb more and more of the value chain.

The way chips are manufactured these days, and the way they are designed, are woven more tightly together than ever before. Cadence design tools have to be intimately aware of the machine settings, and nuances of the chip fabrication materials used by TSMC.

How long before that tight connection between manufacturing process and the design tool, is mirrored in the business of the industry, and sparks a new direction for a large M&A trend?

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