"80 Servings of One Year’s Work at Once"… ARM’s New Weapon Behind Stock Surge [Tech Talk]

ARM's Computing Subsystem (CSS)
First Revealed in the Second Half of Last Year
Success Could Expand Semiconductor Market Share

The company that has recently garnered the most attention in the semiconductor industry is ARM. It recorded its highest-ever quarterly earnings and was even dubbed the second Nvidia. Amid the overall semiconductor market downturn, the demand for artificial intelligence (AI) semiconductors drove ARM's revenue. Notably, Nvidia, a leading graphics processing unit (GPU) player, uses ARM's design to create the data center chip 'Grace.'

However, behind the scenes, ARM's evolving business model is also having an impact. In fact, the next-generation growth engine that will determine ARM's future is a new service called 'CSS (Computing Sub System).'

ARM Controls 99% of Smartphone Chips, But...

ARM recently announced record-breaking results for the third quarter of fiscal year 2024.
[Image source=ARM homepage]

ARM is undoubtedly one of the most important semiconductor technology companies worldwide. It controls 99% of smartphone application processor designs. Moreover, it is expanding its influence into automotive processors, Internet of Things (IoT), industrial microcontrollers, and data center chips.

However, ARM's growth has actually hit a ceiling since SoftBank Chairman Masayoshi Son acquired it. The situation becomes clear when compared to other fabless companies. Nvidia's revenue grew more than fivefold from 2016 to 2022. Qualcomm nearly doubled its revenue. ARM grew by about 59%. While it steadily increased revenue, these results do not match the 'semiconductor boom.'

The reason ARM lags behind other fabless companies in revenue growth lies in its business model. ARM is not a vendor that produces and directly sells finished designs through foundries (contract manufacturers). Instead, it sells the rights to use the instruction set architecture (ISA) and core designs, which form the basis of chip design, to other fabless companies.

Both the ISA and cores are central to chips, especially the central processing unit (CPU), which acts as the brain in electronic devices. This is why ARM is considered central in the semiconductor value chain. However, cores are not the entirety of a chip. To create a finished CPU, various components must still be designed separately and tested. This 'engineering' has traditionally been done by fabless companies themselves. Therefore, ARM's share of the 'total sales value' of computer chips is not very large.

A representative example illustrating the dilemma faced by ARM is Qualcomm's Snapdragon chip. Qualcomm creates computer chips based on ARM's technology, but as the latest generations progress, its dependence on ARM gradually decreases. This ultimately means that ARM's expected revenue steadily declines.
[Image source=Qualcomm]

Moreover, over time, ARM's domain has increasingly come under threat. RISC-V, which offers a free open-source ISA, is a prime example. Also, Qualcomm, a major ARM customer, has released the 'Oryon' CPU, which it designed entirely in-house, including the core. This is ARM's irony. While it is at the center of semiconductor design, its customers are gradually accumulating technology and know-how to seek 'independence.'

ARM's Stagnation and Its New Secret Weapon, CSS

At this point, ARM launched CSS in August last year. CSS differentiates itself from ARM's existing 'design' products. Currently, ARM sells ISA usage rights to customers like Apple and Qualcomm or grants core design licenses to other fabless companies. However, with CSS, ARM sells 'all components that make up the CPU' as a whole.

Design areas supported by ARM CSS. While the existing ARM only handled the 'Processor Block' in the upper left corner, from CSS onwards it covers the entire CPU configuration.
[Image source=ARM]

The core, the basic unit of the CPU, varies in performance depending on electrical signals (clock), L1/L2 cache, and so on. Meanwhile, with the advent of the AI era, interconnect technology linking chips and memory (DRAM, HBM, etc.) has become important, and recently, chiplets that connect multiple dies of a chip to deliver stronger performance have emerged. In the past, fabless companies had to create these other components themselves. But CSS supports all of these at once and even provides final testing.

Through CSS, ARM can capture a larger share of profits within the ARM-based semiconductor ecosystem. It also strengthens its moat by making customers more dependent on ARM's technology.

There are downsides. CSS is mostly a 'fixed' design, like pre-assembled Lego blocks. Customers who purchase CSS designs can design finished chips much more easily than before, but customization according to individual needs is difficult. This means sacrificing some of ARM's traditional flexibility.

Can ARM Expand Its Market While Maintaining Its 'Semiconductor Neutrality'?

So, who will buy CSS? The answer is cloud computing companies. In fact, CSS has already secured two important customers. The first is Microsoft (MS); the 'Cobalt 100,' MS's own CPU for Azure cloud unveiled last November, was made using CSS. The second is Taiwan's Faraday Technology, which recently adopted ARM CSS and Intel's 18A (angstrom) process. Additionally, Amazon AWS, which already uses ARM cores, may join CSS.

Until now, cloud companies have purchased data center chips from vendors like Intel, AMD, and Nvidia. However, as the data center industry grows and the need to establish their own supply chains becomes apparent, they are now designing and supplying semiconductors themselves. This strategy is commonly called 'vertical integration.'

Microsoft's proprietary data center chip, Cobalt 100, is a representative product made with CSS.
[Image source=MS]

CSS is unlikely to appeal to fabless companies that already have massive design teams to create their own chips. But it is different for cloud companies that need to build new design teams. To keep up with fabless companies' latest chip performance, they must release a new chip design every 13 to 18 months. To accelerate this development pace, CSS is ideal.

In fact, ARM emphasizes CSS's greatest strength as being able to reduce engineering time by the equivalent of 80 years. In other words, the workload of 80 top-level semiconductor R&D engineers working for one year can be replaced by CSS.

Given ARM's history of supplying ISA and core designs to fabless companies, a strategy of directly manufacturing and selling semiconductors would disrupt its existing business model. ARM has risen to its current position by positioning itself as a 'neutral country' in semiconductor technology. Therefore, CSS is a very interesting strategy. By enabling cloud companies to make semiconductors themselves, ARM aims at the same server chip market as fabless companies without directly competing with them.

The server chip market is still dominated by a hegemony battle between Intel and AMD. ARM-based server chips have just begun to gain some momentum. However, as CSS gains popularity and more cloud companies shift to in-house semiconductor production, major fabless vendors will eventually become aware of ARM.

Whether ARM can maintain its 'neutral country status' while significantly increasing its profits or whether it will be drawn into fierce competition with fabless companies remains to be seen.