ARM Plans Massive Price Hikes and In-House Chip Design, Challenging Apple, Qualcomm, and Others

ARM Plans Massive Price Hikes and In-House Chip Design, Challenging Apple, Qualcomm, and OthersJanuary 14th, 2024 Chip design giant ARM is poised for an unprecedented transformation. The company, long known for licensing its intellectual property (IP), plans to increase licensing fees by as much as 300% and is actively exploring the possibility of designing its own chips

ARM Plans Massive Price Hikes and In-House Chip Design, Challenging Apple, Qualcomm, and Others

January 14th, 2024 Chip design giant ARM is poised for an unprecedented transformation. The company, long known for licensing its intellectual property (IP), plans to increase licensing fees by as much as 300% and is actively exploring the possibility of designing its own chips. This directly challenges its long-standing major customers, including industry giants like Apple, Qualcomm, and Microsoft.

ARM's low-profile operation has been largely under the radar. For decades, it has played a crucial role in the multi-billion dollar chip market by licensing its IP to companies like Apple, Qualcomm, and Microsoft for a relatively small fee. Despite ARM's pivotal role in driving the development of smartphones and energy-efficient data center chips, its own scale remains dwarfed by its clients. In fiscal year 2024, ARM's revenue was $3.23 billion, while Apple's revenue from hardware products based on ARM architecture exceeded ARM's by over 90 times.

However, Masayoshi Son, CEO of SoftBank Group (which owns approximately 90% of ARM), and Rene Haas, ARM's CEO, are attempting to drastically alter this status quo. This ambition was revealed during a recent court case where ARM sought higher licensing fees from Qualcomm, ultimately unsuccessfully. However, court documents and testimony unexpectedly unveiled ARM's detailed revenue expansion plans. While both ARM and Qualcomm declined to comment, their ambition is now clear.

ARM's expansion plan, codenamed "Picasso," dates back to 2019. According to testimony, the plan aims to increase ARM's annual smartphone market revenue by approximately $1 billion within a decade. The primary method is to significantly increase licensing fees for ready-made chip components designed using its latest computing architecture (Armv9). Documents presented in court showed that as early as August 2019, ARM executives discussed the possibility of a 300% fee increase. In December of the same year, then-CEO Simon Segars reported to Chairman Masayoshi Son that ARM had reached an agreement with Qualcomm on technology usage under the "Picasso" plan.

However, major clients like Qualcomm and Apple possess the capability to design chips independently from scratch based on ARM architecture, negating the need for more expensive ready-made technology. Therefore, ARM's plan to drastically increase licensing fees may not significantly impact these clients. In 2021, Qualcomm's acquisition of startup Nuvia was precisely aimed at reducing its reliance on ARM's ready-made technology. Court records reveal that on the day of the acquisition, Haas mentioned in a Microsoft Teams chat: "We have legacy agreements with Qualcomm & Apple." Notably, ARM internally refers to Apple as "Fender." Apple has not commented on this matter.

Since SoftBank's acquisition of ARM in 2016, the British company's computing architecture has expanded from primarily supporting smartphones to personal computers and data center markets. According to executive testimony and documents from the court case, ARM is discussing a phased rollout of its own complete chip designs. Currently, ARM primarily profits from selling chip design blueprints, but most clients still need months to complete chip design. Prakash Sangam, founder of market research firm Tantra Analyst, testified, "I was hearing for the first time that ARM is looking at going into chip manufacturing themselves, which would send chills down the spines of their customers."

In court, Qualcomm's lawyers presented a PowerPoint presentation Haas submitted to the board in February 2022 while campaigning for the CEO position. Haas proposed that ARM shift its business model to not only sell chip design blueprints but also directly sell chips or "chiplets," components used in manufacturing parts of processors, widely adopted by companies like AMD. Testimony and documents show that in December 2021, Haas expressed confidence in a conversation with another ARM executive that launching its own chips would allow ARM to directly compete with its clients. He wrote in a Microsoft Teams message: "Others are screwed." This hints at the potential competitive pressure ARM's complete chip designs could place on companies like Qualcomm.

However, Haas downplayed the impact of these statements in court, describing them as "brainstorming" during discussions of long-term strategy with colleagues and board members, adding, "I think about the future every day."

The court case also revealed ARM is seeking closer partnerships with device manufacturers. In October 2022, Masayoshi Son and Haas met with Samsung executives. Son informed Samsung that Qualcomm's licensing agreement with ARM was expiring in 2025. Qualcomm CEO Cristiano Amon testified that Samsung subsequently expressed concerns about Qualcomm's ability to maintain a stable chip supply. Amon stated he assured Samsung that Qualcomm's licensing agreement with ARM had been extended to 2033. However, Amon also mentioned that due to the uncertainty caused by the above events, Samsung reduced its planned three-year chip supply agreement to two years. ARM disputed parts of Amon's testimony.

ARM's plan to significantly increase licensing fees and enter chip manufacturing will undoubtedly have a profound impact on the entire chip industry. This not only affects ARM's future direction but also necessitates strategic adjustments from its numerous clients. The future will see increasingly intense and complex interactions between ARM and its customers. The ultimate outcome of this transformation remains to be seen.