Thuh giants, governments, trustees, investors: all eyes are on Arm’s long-awaited listing. Despite the recent drop in tech stocks, SoftBank, the Japanese group that paid $32 billion for the British chip designer in 2016, still plans to refloat its shares next March. On May 30, Cristiano Amon, head of Qualcomm, an American chipmaker, told the financial times it would like to create a consortium with rivals like Intel or Samsung, either to buy a majority stake in Arm or to buy it outright, as Nvidia, another US company, tried to do in 2020 in a failed $40bn deal. Some British politicians argue that Arm is so critical that the government should take a “golden share” of control. On June 14 it was reported that, perhaps in response, SoftBank was considering a secondary listing in London alongside the main one in New York.
Look at Arm’s finances and the interest seems baffling. Its sales jumped 35% last year to $2.7 billion, not bad, but it’s a peanut compared to the chip design giants. Its valuation, as the Nvidia deal implies, has increased by a quarter in six years. In the same period, Qualcomm’s market capitalization halved and Nvidia’s grew 13-fold, despite recent market carnage.
There are two explanations for the mismatch between arm size and the greed it causes. The first is the ubiquity of its products. Rising from the remains of Acorn Computers, a British desktop manufacturer, in 1990, Arm has grown to the point where almost every major tech company uses its designs. Most modern phones contain at least one chip built on top of their technology. That makes it a cornerstone in the $500 billion chip industry. Arm’s second selling point is its potential. After years of trying, his designs are making inroads into lucrative markets like personal computers and data centers. They could also power everything from cars to light bulbs as more everyday objects become computers.
Start with ubiquity. Unlike companies like Intel, which sell chips that it designs and manufactures itself, Arm deals only in intellectual property (IP). For a fee, anyone can license one of his designs out of the box, modify it if necessary, and sell the resulting chip. In addition to licensing revenue, Arm earns a small royalty from each sale of a chip built with its technology. In 2021, license revenues accounted for just over $1 billion, while royalties brought in $1.5 billion.
Removing the need to design a chip, a complicated and highly specialized job, has made Arm’s off-the-shelf designs popular, especially as chips have become increasingly complicated. New Street Research, an analyst firm, Reckon’s Arm has a 99% share of the $25 billion smartphone chip market. Its products are widely used in everything from drones and washing machines to smart watches and cars. Arm says it has sold just under 2,000 licenses since its founding (see chart). More than 225 billion chips based on his designs have been shipped. It hopes to reach 1 trillion by 2035.
The company’s long list of clients explains the backlash against the proposed purchase of Nvidia. Simon Segars, who stepped down as Arm’s boss this year, used to describe the company as the “neutral Switzerland of the tech industry”. Other chipmakers feared that giving control to a rival would undermine this neutrality, explains Geoff Blaber of DC Insight, a research company. So did confidence hunters in the big markets, whose concerns derailed the deal. Few were reassured when Nvidia’s Jensen Huang CEOhe insisted that he had no plans to use Arm to block opponents.
Arm’s ability to attract so many customers points to another explanation for the mismatch between its importance and finances. One of the main reasons Arm’s technology triumphed over rival chip architectures was low prices. New Street reckons that arm earns royalties of just $1.50 from the sale of a high-end smartphone, for which a consumer can shell out $1,000 or more. The cheapest gadgets could earn a few cents.
The firm has increased its royalty rates over time, notes New Street’s Pierre Ferragu, often when a new version of its designs is released. According to an insider, SoftBank wanted to increase them even more. But, he says, the plan caused friction with Arm’s bosses, who were concerned it would anger existing customers. It could also jeopardize Arm’s efforts to conquer new markets.
In 2020, Apple, which has long used Arm chips in iPhones, began replacing Intel silicon in its laptops and desktops with Arm-based designs. Although Apple isn’t as big in this area as it is in smartphones, it was a vote of confidence for Arm in what had been foreign territory.
Arm has also been increasingly competing in the high-margin business of servers, the high-spec machines found in data centers. That market has been dominated for decades by Intel, but in recent years Arm has scored notable victories. Amazon Web Services, the e-commerce giant’s cloud division, now uses many Arm-derived “Graviton” chips. Ampere, a US company that sells data center chips, also bases its products on Arm’s designs, as do several makers of specialized processors for tasks such as network management. TrendForce, another research firm, predicts that Arm processors could account for 22% of installed server chips by 2025.
Under the ownership arm of SoftBank, a lot of money has been poured into research and development, says Mr Blaber. That will help you maintain your technological advantage. However, he is limited in how much he can charge for his products by the appearance of a new competitor: risky–v. This is a novel chip architecture that is completely devoid of royalties and license fees. In 2020, Renesas, an Arm licensee, announced that it would use risky–v for a new generation of products. Intel, Qualcomm and Samsung, among others, are also interested in the technology. Whatever Arm’s fate, as a public company, state-controlled or under the tutelage of a consortium of chip industry heavyweights, its future will likely resemble its past: vital but, by the standards of Silicon Valley, a small fish. ■
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