Arm Aims to Hike Prices, Develop Its Own Chips to Compete with Customers

Arm Holdings, the technology supplier to major chip companies, is pursuing an aggressive long-term strategy to significantly increase its royalty rates and even develop its own chips, Reuters reports, citing court documents and testimony from a recent trial. This move marks a shift for the British firm, which has traditionally maintained a low profile despite playing a crucial role in billions of dollars worth of chip sales annually.

For decades, Arm has licensed its intellectual property (IP) to major chip designers such as Apple, Qualcomm, and Microsoft, charging a relatively small royalty for each chip produced using its technology. Despite its central role in the development of smartphones and energy-efficient data center chips, Arm has remained significantly smaller than its customers. In fiscal year 2024, Arm generated $3.23 billion in revenue, while Apple's hardware product revenue (all powered by Arm-based chips) was over 90 times larger.

However, Masayoshi Son, CEO of SoftBank Group (Arm's majority shareholder), and Arm CEO Rene Haas are determined to change this dynamic. Court documents from a recent trial, where Arm unsuccessfully sought higher royalty rates from Qualcomm, reveal ambitious plans for Arm's future.

These plans, codenamed "Picasso," date back to at least 2019 and aim for a roughly $1 billion increase in annual smartphone revenue over the next decade. A key component of this strategy involves substantially increasing the per-chip royalty rates for customers who use ready-made parts of chip designs based on Arm's latest computing architecture, Armv9. Documents from the trial indicate that Arm executives discussed a 300% rate increase as far back as August 2019.

While sophisticated customers like Apple and Qualcomm have the capability to design their own chips from scratch using Arm's architecture, they may not necessarily be subject to the full extent of these rate increases. However, the potential for higher royalty rates is causing concern among Arm's customer base.

Beyond royalty rate increases, Arm is also considering developing its own complete chip designs. This move is intended to reduce reliance on customers for ready-made technology and potentially offer a more competitive product.

"It was news to me that Arm is even thinking about (making its own chip)," said Prakash Sangam, founder of Tantra Analyst, to Reuters. "It should send a chill down the spine of their customers."

The potential for Arm to develop its own chips has raised eyebrows. During the trial, Qualcomm attorneys presented a slide from Haas' presentation to Arm's board in February 2022, where he suggested a shift in Arm's business model, moving beyond selling chip blueprints to selling chips or chiplets (smaller building blocks for processors).

These revelations highlight the evolving power dynamics between Arm and its major customers. The company is clearly seeking to leverage its technology to become a more significant player in the semiconductor industry. While the full impact of Arm's plans remains to be seen, the potential for significant price increases and the development of Arm's own chips could have significant implications for the broader tech ecosystem.