Shulou(Shulou.com)11/24 Report--

On the morning of October 19, Beijing time, it was reported that Arm, a British chip design company, chose to take risks on the eve of the much-anticipated IPO: suing its big customers. However, as it is about how to distribute the revenue generated by its technology in new markets, Arm may have no choice but to resort to law.

The lawsuit was filed in Delaware District Court in late August. In the indictment, Arm accused mobile chip technology company Qualcomm of using Arm's intellectual property without permission. The case stems from Qualcomm's $1.4 billion acquisition last year of startup Nuvia, a chip design company based on Arm architecture.

The acquisition highlights the technological interdependence between Arm and Qualcomm: both companies are looking outside the established smartphone industry for new markets that can continue to expand. Nuvia's first design was an Arm architecture chip for data centres, but Qualcomm said it wanted to use the same design to break into other new markets where Arm technology is not yet widely adopted, such as laptops and cars.

Stasi Stacy Rasgon, an analyst at Bernstein Research, the US investment bank, said Arm relied heavily on clients such as Qualcomm to introduce technology into new markets because they "need a growth story" to attract investors for IPO, which is launched next year. "if you can only tell the story of smartphones, you won't perform very well."

However, after months of negotiations, Arm and Qualcomm have failed to agree on how Qualcomm will use Nuvia technology. So Arm chose to go to court. The company claimed that the license it granted to Nuvia was non-transferable and asked Qualcomm to destroy all intellectual property it acquired through the acquisition.

Qualcomm believes that the licensing agreement they signed with Arm a few years ago can cover Nuvia's technology, so it applied to the court to dismiss the case immediately.

The dispute has exposed the intricacies of Arm's licensing arrangements-in some cases, Arm may even compete directly with customers. In this process, some of Arm's big customers choose to increase the proportion of internal chip design, hoping to highlight the differentiation of their own devices, thus posing a challenge to Arm's business model.

Arm has achieved great success in the field of mobile devices with its low-power chip design. Last year, Qualcomm became the largest seller of Arm architecture chips in mobile devices, according to market research firm Strategy Analytics. It is estimated that the total value of Arm architecture chips used in smartphones, laptops and tablets is $35.1 billion, with Qualcomm alone contributing $12 billion. It was followed by Apple, the technology giant that designed chips for MacBook and iPad based on the Arm architecture, with sales of $11 billion.

The licensing fee for Arm comes from two licenses. One, called technology licensing, covers the computing core based on the Arm architecture, which is the central "brain" of computer processors. Qualcomm will buy Arm's Cortex core and use it for Snapdragon smartphone processors.

Another license for Arm can only cover its basic chip architecture. Nuvia is licensed for this, and there are about a dozen similar companies that design their own computing cores based on Arm's architecture.

Arm negotiates the license terms with each customer on a case-by-case basis and does not disclose the license rates, but the rates under the technology licensing model are usually higher because Arm requires additional work design and calculation core. Last year, Arm's unlicensed revenue, the upfront fee charged when signing a new license agreement, increased by 61 per cent. But the company's $1.54 billion in licensing revenue still accounts for 58 per cent of revenue, up 20 per cent from a year earlier.

Sravan Kundojjala, an analyst at Strategy Analytics, estimates that Qualcomm sells about 350 million to 400m chipsets using Arm cores each year, each paying about 80 cents to Arm. But if Nuvia's "Phoenix" core is used instead of Arm's Cortex core, it is possible to save 40 to 50 per cent of license fees.

In response to the lawsuit late last month, Qualcomm said it could use Nuvia's technology to compete directly with Arm, as well as with other companies that use Arm patents and Intel's x86 chip architecture. Qualcomm also said it expects to use the core of Nuvia in the crucial smartphone market, which is the largest piece of Arm's existing business.

Qualcomm is not alone in creating more advantages for its products by controlling more chip design processes. Apple is also developing its own computing core based on the Arm architecture, which surprised the entire technology industry with its first M1 chips two years ago.

Nvidia, another big customer of Arm, agreed to pay $750 million for a broad license to Arm technology when it agreed to buy Arm in 2020. The deal includes an architectural license, but Nvidia recently said it chose to use Arm's Neoverse core in its latest data center chip.

As top chip companies invest more resources to develop their own computing cores based on the architecture licensing model, "the licensing fees Arm gets through some customers seem to be lower," says Mr Lasgaon. "many of their customers may turn to royalty models, but the value of this model will be greatly reduced."

Bob O'Donnell, an analyst at TECHnalysis Research, the market research firm, added that the shift could force the market to rethink Arm's IP charging model. "some people think that Arm fees were not high enough in the past, so structure licensing fees should be raised." He said. Condogara said that because of the high concentration of Arm's customers, about 1/5 of customers contributed 80 per cent of licensing fees, putting more pressure on the company's revenue.

However, it is not uncommon to go to court because of important intellectual property issues before IPO. Yahoo sued Google for infringing one of its search advertising patents before its 2004 IPO. The two sides finally reached a settlement. For Arm, the pressure is to prove to potential investors how they can maintain good licensing rates while looking forward to a new phase of growth.

Welcome to subscribe "Shulou Technology Information " to get latest news, interesting things and hot topics in the IT industry, and controls the hottest and latest Internet news, technology news and IT industry trends.