[Tech Talk] 'Original Technology Boss' ARM, Why Is It Trying to Make Chips?

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ARM Limited (ARM), known as a semiconductor design company, is designing its own system semiconductor finished products. Considering ARM's existing business model of only lending design blueprints and technology to other semiconductor design companies, this appears to be an unusual move.

Of course, the possibility of ARM immediately creating its own chip brand is very low. ARM earned the nickname "the Switzerland of the semiconductor industry" by not competing with its clients. So, what is the real reason ARM has started producing its own chips?

ARM, Mastering Core Technology, Begins Designing Its Own Chips

ARM Limited logo [Image source=Yonhap News]

According to a report by the UK financial media Financial Times (FT) on the 23rd (local time), ARM has recently established an in-house "Solution Engineering Team" and is designing its own computer chips. FT cited sources in the semiconductor industry saying this chip is "technologically more advanced than any previous product."

In fact, ARM appears to be putting considerable effort into developing its own chips. Since February, it has recruited Kevork Ketchchan, who developed the "Snapdragon" chip at semiconductor design company Qualcomm, to lead the Solution Engineering Team.

This move is somewhat unusual considering ARM's existing business model. The system semiconductor industry is commonly divided into foundries (contract manufacturing) that directly produce chips and fabless companies (chip design). Among these, ARM has grown by selling the design blueprints, i.e., "core technology," which form the basis of chip design, to fabless companies.

ARM's business model mainly consists of two parts: the architecture license, which is the foundation of all chips, and royalties from selling the "core" designs embedded inside actual chips.

Today, most chip companies pay ARM licensing fees to obtain architecture usage rights and arrange ARM cores inside their chips to create finished chip designs. All these products belong to the "ARM ecosystem." Especially in the smartphone application processor (AP) market, over 90% are ARM chips, making it virtually a monopoly ecosystem.

Stable but Slow Growth... The Dilemma of ARM's Business Model

ARM generates revenue by selling technology architecture licenses and core design royalties.
[Image source=ARM]

ARM's business model guarantees stable revenue but also has a critical drawback: it is difficult to achieve rapid sales growth. This issue is particularly prominent in ARM's former core business of licensing.

ARM sells usage rights for its architecture through negotiations with various clients for periods ranging from several months to years. However, since the birth of the open-source architecture "RISC-V" in 2010, the licensing business model has been shaken. To block RISC-V's expansion, ARM had to lower or even offer free licenses for its outdated architecture, engaging in price competition.

Looking at ARM's revenue structure in 2014, license and royalty revenues were almost equal at a 50:50 ratio. But by 2021, license revenue ($1.1 billion) lagged significantly behind royalty revenue ($1.5 billion). This trend is becoming increasingly pronounced.

Instead, the business driving ARM's growth has been royalties from system semiconductor cores. A central processing unit (CPU) is made by integrating multiple cores, and companies designing ARM-based CPUs such as Qualcomm, Samsung, and Huawei purchase these core designs from ARM to design their chips.

Core royalties are not sold through negotiated licenses like architecture but are paid as a portion of chip sales revenue, allowing ARM to benefit more directly during semiconductor booms.

ARM's New Growth Engine... Increase Royalty Revenue

NVIDIA, a graphics processing unit (GPU) designer, has developed the next-generation 'Grace Hopper' superchip. Among them, the Grace chip is a high-performance chip featuring 144 ARM Neoverse V2 cores, attracting significant attention in the industry. [Image source=NVIDIA]

However, the royalty business also has its limits. Typically, ARM's royalties amount to only about 1-2% of chip sales prices. From ARM's perspective, this means taking only a tiny fraction of the total revenue generated by the "ARM semiconductor" ecosystem, which sells billions of units annually, naturally leading to a desire for more.

Moreover, ARM's owner, SoftBank Chairman Masayoshi Son, plans to list ARM on the New York Stock Exchange this year. To be valued higher in the stock market, ARM must demonstrate that it can secure growth engines beyond its current state.

Meanwhile, FT reported last month, citing semiconductor industry sources, that ARM may soon significantly raise royalty prices. Even raising royalties to just 10% of chip sales prices would cause ARM's revenue to increase at least fivefold.

ARM is currently gaining "momentum." Recently, ARM cores have also stood out in server CPUs and AI chip markets. ARM's high-performance CPU core series "Neoverse" is featured in Amazon AWS's "Graviton," one of the world's largest cloud companies, and Nvidia has released the AI CPU "Grace," equipped with 144 latest Neoverse V2 cores.

From ARM's perspective, this is a golden opportunity to expand the market and increase revenue.

Fabless Companies' Complaints Are a Concern... 'Own Chips' Must Prove Performance

SoftBank Chairman Masayoshi Son, preparing for the New York Stock Exchange listing of its subsidiary ARM.
[Photo by Yonhap News]

However, ARM cannot recklessly raise royalty prices because its major clients would express dissatisfaction. To appease customers, ARM must prove the "value of royalties" itself. This is where the "own chips" currently being developed in-house by ARM become important.

If ARM can demonstrate game-changing performance with its own chips that integrate its new technologies, design companies are likely to accept price increases and remain within the ARM ecosystem to design chips.

However, this move carries risks. The biggest risk is that RISC-V, which boasts the advantage of being free, could quickly lure away ARM's customers.

Nonetheless, since chip design companies have long depended on ARM's design technology, a complete departure will take some time. In a way, this sets the stage for a major race that could bring significant changes to the semiconductor design market landscape.