1. IBM Haifa Labs June 23, 2015 © IBM Corporation 2004 Economics of information goods in practice – the Electronic Design Automation market Yossi Lichtenstein

2. IBM Haifa Labs © IBM Corporation 2004 2 Research Problem  How useful are the lessons taught in business schools?  How practical are the prescriptions coming from the study of the economics of information goods?  For example, Shapiro and Varian’s lessons - Versioning and rights management - Managing the lock-in cycle - Creating positive feedback and standards  A tradition of asking and answering such questions - for example, in the 50s, how useful for managers is the rule (price = marginal cost)?

3. IBM Haifa Labs © IBM Corporation 2004 3 The Case  IBM’s lab in the Haifa University campus  Largest IBM Research Division operation outside the US  Employs about 400 R&D staff in a variety of areas  The Electronic Design Automation (EDA) departments – - 75 staff - a research center in a specific EDA area - and a central tool development group in that area - its tools have been used extensively within IBM for more than a decade and saved hundreds of millions of dollars in development cost - IBM is now willing to sell these EDA tools to external customers

4. IBM Haifa Labs © IBM Corporation 2004 4 Research Questions  What practical lessons can we draw from the Economics of information goods with respect to the EDA tools of the Haifa Lab?  Are these lessons different from the answers given by the labs’ managers?

5. IBM Haifa Labs © IBM Corporation 2004 5 The EDA market – an Economics of information goods view SupplyDemand Technological Change More powerful computers allow new EDA technology More complex ICs require new EDA techniques Economies of scale Low marginal cost, very high fixed cost Popular EDA platforms gain more EDA applications

6. IBM Haifa Labs © IBM Corporation 2004 6 Which is stronger – change or scale?  The EDA market - Annual revenues are just $4B (IC market around $1,000B) - 85% of revenue by three companies (2002 numbers)  Cadence $1,300M5,200 employees  Synopsys $900M 4,250 employees  Mentor $600M 3,500 employees - Many small companies, mostly young, for example  Verisity$52M 200 employees  Economies of scale (most importantly on the demand side) are overwhelming

7. IBM Haifa Labs © IBM Corporation 2004 7 Practical implications  As the technological change is not the driving force, - selling IBM’s innovative point tools to end-users would be difficult  Because the network externalities are dominant - it would be better to tie the tools to EDA platforms  by selling them to EDA vendors  by integrating tools into the platforms

8. IBM Haifa Labs © IBM Corporation 2004 8 What are the managers’ intuition?  Managers are aware of the importance of platforms - mostly with an engineering perspective, namely that integration of the tools within the platforms will benefit customers  However, the strength of platforms is not fully absorbed  The practical implications are not clear

9. IBM Haifa Labs © IBM Corporation 2004 9 More practical implications  Versioning and price discrimination - R&D staff wish to sell the best tool and resist selling inferior versions  Managing the lock-in cycle - free evaluation copies are common in the EDA market - but low prices for entry level versions are not  Creating positive feedback and standards - the Haifa lab initiated successfully a standard

10. IBM Haifa Labs © IBM Corporation 2004 10 More questions  What are the quantitative measures of the two forces? - it would help in the on-going discussion with the R&D staff  Where is our technology on the S curve? - when the application should be tied to a platform - the number of current customers may be misleading - the number of platforms who have bought the technology may be more important  Make or Buy? (“Corporate EDA”) - for a market with network externalities, - Williamson’s reasoning is lacking  uncertainty is not only related to the transaction  but to the market and technology

11. IBM Haifa Labs © IBM Corporation 2004 11 Contributions and limitations  An internal, practical perspective of a commercial situation regarding information goods  Raises some interesting questions for further research  An R&D context with little commercial infrastructure  Methodologically lacking, mostly observations of a semi-participant

12. IBM Haifa Labs © IBM Corporation 2004 12 Conclusion  For the described case, - there are strong practical implications - from understanding the nature of a market with network externalities - these implication are not intuitive - and the required actions are not obvious  Some of the lessons taught in business school are useful