Arm Aims to Alter Business Ahead of IPO

To drum up revenue, Arm is considering whether to require OEMs to directly license the right to use Arm-based chips in their designs. However, Arm risks affecting its long-term business prospects by appearing capricious and greedy.

Joseph Byrne

Arm is considering whether to require OEMs to directly license the right to use Arm-based chips in their designs. The company’s practice has been to collect royalties from chipmakers, who can sell their products unencumbered to OEMs. The selling price of a finished product is much greater than that of a component, raising the basis against which Arm can levy a royalty.

The brewing conflict over licensing changes is of Arm’s making. All companies try to maximize revenue, but investors also want stability. Altering licensing terms introduces uncertainty. It’s unclear whether Arm can execute such a change, how fast it’ll push customers and OEMs to find alternatives, and how much future growth it’ll forego.

Modifying an existing system is unwelcome if the system is working well, and greed stirs up rancor. A company holding the trump card of essential patents can tolerate resentful licensees, which have little choice but to pay up. Lacking such a strong position, Arm can’t.

Moreover, Arm is becoming pugilistic just as it faces new competition from RISC V. The upstart instruction set has garnered support from companies pursuing everything from microcontrollers to server processors, but it has made only a small dent. Arm has every advantage: an installed code base, well-supported CPUs, and better development tools. But they won’t be enough to keep companies from switching if Arm forces a costly licensing change. A little attrition is inevitable, but the defection of a major OEM could start a chain reaction.

By appearing capricious and greedy, Arm risks reputational loss that will affect its long-term business prospects. It’s an economic truism that simply raising prices (which a direct licensing scheme effectively seeks to do) will reduce demand. The open questions are how much and how fast. More difficult to measure will be the opportunities lost—the markets Arm will fail to crack.