Arm changes business plan ahead of US IPO

Having announced it's entering the stock market, Arm is making its chip designs more expensive - to the annoyance of many.
30 March 2023
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Arm, the chip design company owned by SoftBank, has notified customers of a change to its pricing. Among the companies affected are big names such as MediaTek Inc, Qualcomm Inc, and Xiaomi Corp, but tech giant Apple has a “special royalty agreement” with Arm, which will remain the same. Arm designs the blueprints for chips used in 95% of smartphones, IoT devices, and just about anything digital in one form or another.

Earlier this year, after a sale to Nvidia fell through, Arm announced that the company was going to be listing shares on the New York stock market, despite UK government lobbying for a London entry. The company is expected to aim to raise at least $8 billion from the flotation.

There are four investment banks chosen to lead the listing: Goldman Sachs, JPMOrgan Chase, Barclays and Mizuho Financial Group. Even though Arm is a UK company, some are blaming the decision to go to America on the UK’s Financial Conduct Authority (FCA) not being sufficiently flexible in waiving its rules.

Arm was put off by regulations regarding the reporting of related party transactions, which caused concern that it would have to report to he FCA any dealing it had with parent company SoftBank, or one of its offshoots. It may also be wary of the political state of the UK recently, particularly given the government’s lack of technology legislation.

Changing its business plan suggests Arm is seeking to increase its revenue ahead of the initial public offering in New York. Previously, the chip designer charged royalties based on the chip’s value. Now, it has told its customers that royalties will be charged based on the value of the device the chip ends up in.

Since the value of, say, a smartphone is greater than the value of an infrared sensor, the revenue for every chip that Arm sells will multiply. Although the company has a monopoly on the chip market, there’s competition around and emerging (such as RISC V), and the price rise might turn customers away.

A former senior employee, who left last year, told the Financial Times that “Arm is going to customers and saying ‘we would like to get paid more money for broadly the same thing.’”

According to Gatner vice president analyst Alan Priestley, enterprise buyers are increasingly looking at alternative architectures. “A lot of companies are looking at alternate sources of IP, maybe not switching totally away from Arm, but having the option of Arm or RISC-V in their products,” Priestley said. “RISC-V was already gaining traction before SoftBank decided to try and offload Arm, and I think that has increased the focus of some of the semiconductor companies on RISC-V as an alternative.”

The UK technology success story is unlikely to be shaken from the top just yet. Still, the changes represent one of the biggest shake-ups at the company in decades. Reportedly, it is unhappy with customer’s reluctance to accept the new agreement.