SoftBank-Backed Arm Plans Major Price Hike: Apple, Qualcomm Supplier Explores Chip Development

Arm Holdings, the British technology supplier to chip firms, is planning a significant shift in its business strategy. The company, which is majority-owned by SoftBank Group, aims to hike prices by up to 300% and has discussed designing its own chips in a move to compete with its biggest customers, such as Apple and Qualcomm. This strategic shift was revealed during a recent trial in which Arm attempted to secure higher royalty rates from Qualcomm.

For decades, Arm has operated at the heart of billions of dollars of chip sales per year, licensing its intellectual property to tech giants like Apple, Qualcomm, and Microsoft. The company charges a small royalty for each chip produced using its technology. Despite its pivotal role in the rise of smartphones and energy-efficient data center chips, Arm has remained relatively small compared to its customers. In fiscal year 2024, Arm's revenue stood at $3.23 billion, while Apple's revenue from hardware products powered by Arm-based chips was over 90 times larger.

Masayoshi Son, CEO of SoftBank Group, and Arm CEO Rene Haas are determined to change this scenario. Their plans, revealed during the trial, indicate a long-term strategy to increase annual smartphone revenue by approximately $1 billion over a decade. This increase is expected to be achieved partly by raising the per-chip royalty rates that customers pay for ready-made parts of chip designs using Arm's latest computing architecture, Armv9.

During the trial, documents were shown from August 2019 in which Arm executives discussed a 300% rate increase. In December 2019, Simon Segars, then CEO of Arm, informed Son that Arm had secured a deal with Qualcomm to use ready-made technology under the "Picasso" initiative. However, large customers like Qualcomm and Apple, who have the capability to design their chips from scratch using Arm's architecture, may not necessarily be subject to all of those rate increases.

Arm's plans also include potentially inching closer to making a complete chip design of its own. The company sells chip-design blueprints, but most of its customers still spend months completing the chip design. This move could position Arm as a direct competitor to its current customers, potentially sending a "chill down the spine of their customers," as noted by Tantra Analyst founder Prakash Sangam.

At the trial, Qualcomm attorneys showed a slide from Haas' presentation to Arm's board in February 2022 when he applied to become CEO. The slide suggested Arm change its business model by selling chips or chiplets instead of only chip blueprints. In a conversation with another Arm executive a few months earlier, Haas expressed confidence that Arm could compete against its own customers if it put a chip into the marketplace.

Arm's potential entry into chip manufacturing could significantly reshape the competitive landscape of the semiconductor industry. By producing its own chips, Arm would no longer be just a technology licensor but a direct competitor to its current customers. This shift could lead to direct competition with customers, disrupt existing supply chains, intensify competition in the server market, impact royalty rates, and drive innovation and technological advancements.

In conclusion, Arm's proposed price hike and exploration of chip development mark a significant shift in the company's strategy. While these changes could have implications for its customers' profitability and market competitiveness, they also offer strategic advantages and potential impacts on Arm's relationship with customers. The potential entry into chip manufacturing could influence the competitive landscape of the semiconductor industry, leading to direct competition with customers, disruption of existing supply chains, and increased competition in the server market. As Arm navigates these changes, it is essential for the company to maintain its strong position in the semiconductor industry while avoiding alienating its customers.