Arm wants to get a percentage of every smartphone sold
Arm will try to reverse the trend of declining profits with a new licensing scheme
(photo: CC0 Public Domain)
British holding company Arm, developer of reference processor designs with the architecture of the same name, hopes to go public this year. The owner’s manual of Arm, the Japanese one SoftBank, plans changes to the business model to make the company’s assets more attractive to investors.
Arm wants to receive a percentage of every smartphone sold, and not, as before, of every chip sold with Arm architecture. Such a licensing scheme is expected to multiply the revenue of the developer, given the disproportionately higher price of smartphones than the price of the chip in them. The plans, which Arm is already discussing with MediaTek, Unisoc, Qualcomm, Xiaomi and Oppo, were revealed to the Financial Times.
Arm currently receives revenue from the sale of its technology through two main channels. Processor developers enter into licensing agreements with Arm that provide for payments of 1% or 2% of the price of each processor sold. In addition, there is a general payment for the right to use Arm’s developments from the processor suppliers, the amount of which does not depend on the number of products sold.
The new monetization option for Arm’s developments provides for the provision of rights to processor manufacturers for free, but with a clear limitation of the list of customers who will eventually receive these processors. Once incorporated into electronic devices, Arm’s know-how will serve as the basis for receiving royalties from each item sold, with the amount calculated as a percentage of the price of the entire device.
The average price of a smartphone last year was 355 dollars, and market participants informed of Arm’s plans believe that the amount of payments to the British holding company will increase many times. One or two percent of each processor sold, ranging from $6 to $40, generates a much more modest cash flow.
Arm hopes to move to the new licensing terms from 2024, but for now it’s only “drilling the ground.” The interests of Apple, which is both a developer of processors and a supplier of smartphones and other devices, have not yet been taken into account in the negotiations, although this case will obviously be considered separately.
Arm’s new business model may be necessary amid declining profits in recent years, even as revenues grow. Arm’s expenses more than doubled between 2015 and 2019 to $1.6 billion. Revenues in the same time period rose just 20% to $1.9 billion, but profits fell 70% to $276 million
The author of the new initiative is considered to be the head of SoftBank – Masayoshi Son, who in a narrow circle has shared his dissatisfaction with Arm’s current income against the background of the multibillion-dollar income of Nvidia, Broadcom and Qualcomm. But even the existing licensing scheme gives rise to conflicts and litigation between Arm and customers, and when much larger sums are involved, disputes can escalate.