Could Arm rely on licensing customized SoC solutions beyond standard IPs as new profit booster after IPO?

Amanda Liang, analysis; Willis Ke, DIGITIMES Asia 0

Credit: AFP

With SoftBank-backed IP giant Arm launching a blockbuster IPO (initial public offering) on the US Nasdaq market on September 14 at a unit share price of US$51, its CEO Rene Haas bears a fresh mission of finding a new profitable formula for the company, and licensing customized system-on-chip (SoC) solutions rather than just standard IP products could be a new way to boost profits after the IPO.

Since the start of 2023, the Financial Times (FT) has been consistently releasing reports regarding Arm, ranging from the company developing its own chips to various technology giants vying to invest in Arm to get a piece of the pie. As of now, to some extent, it appears that the reports are not far off the reality.

Besides Intel and TSMC taking the lead to announce buying stake in Arm before the company set its listing price, many other tech players including Apple, Google, Nvidia and Samsung have said they will buy shares in the IPO. Moreover, Arm CEO Haas recently also confirmed in an interview with Bloomberg that the company is shifting its business strategy towards offering licensed SoC solutions to its customers, rather than just IP licensing.

Reversing the "thin profit, high volume" strategy

Arm seems to believe that profits from licensing IP and selling standard products are quite limited. Haas emphasized that Arm's previous focus on "thin margins and high sales volume" must be reversed, as selling more is not necessarily a better thing.

Arm focusing on the mobile market and thus struggling to boost profits has been a highly controversial aspect of its business model. Now that it is publicly listed, the company will face scrutiny from the capital market every three months through its quarterly financial reports, and it must provide effective profitability equations.

The method to boost the company's profitability lies in Arm's current path of developing reference chip designs for its customers. According to the documents submitted by Arm to the U.S. Securities and Exchange Commission (SEC), the company emphasizes its recent investment in a solution-centric overall design approach, which goes well beyond its previous focus on individual design IP elements and aims to provide customers with a more comprehensive system.

The documents indicate that by providing SoC solutions optimized for specific application cases, Arm will ensure seamless integration throughout the entire system, thereby delivering maximum performance and efficiency. It is believed that through significantly increasing its investment in overall chip design, Arm can further reduce the development costs and risks that customers have to bear, thus enabling it to charge higher unit prices for each device.

Will the strategic change in Arm's operating model conflict with the interests of its customers?

The thin-margin, high-volume IP licensing model in the mobile device market has been unable to sufficiently bolster Arm's revenue scale. The model has entailed very high gross profit margins, but the actual absolute profits have been relatively thin. In light that cloud servers, data centers and automotive markets currently boast the highest growth momentum, Arm is keen to create customized SoC solutions for these high-profit application markets, hoping to offer customers almost complete SoC solutions on a licensing basis, rather than just core IP components.

It is not yet clear whether Arm's shift in business model may anger traditional SoC developers and customers like Qualcomm, Ampere, Nvidia, and others. However, Arm seems to be carefully laying out this so-called customized design strategy shift. But it remains uncertain whether Arm is primarily targeting customers like AWS, Google, Microsoft, and others who develop their own chips, and it also remains unknown as to which competitors the company will be directly competing with in the automotive sector.

In the public media, Arm has mainly discussed how this shift in its business model can enhance profitability, highlighting its expertise in high performance, energy efficiency, and more customized designs, as well as the added value they can deliver to customers. However, Arm has refrained from touching on whether this strategy change might conflict with the interests of its existing customers.

Furthermore, Arm has never mentioned selling chips outright in any of its public records so far. It has always referred to the transition from licensing standard IP to licensing SoC solutions as providing "licenses" and "more comprehensive SoC solutions." However, Haas claims that Arm will provide customers with more complete chip designs that can be directly sent to semiconductor foundries, eliminating the need for customers to inject additional IC design resources. In the future, it remains to be seen how Arm will do to avoid potential conflicts with customer interests as it carries on with the strategy shift.