On Thursday, Arm was successfully listed in the United States and became the "new star" that investors paid most attention to. It surged 25% on the first day of listing, and the intraday increase once reached 30%. But on Friday, Arm's stock price fell, closing down 4.47% at $60.75, with a market value of $62.333 billion. Will the IPO "Big Mac" encounter the dilemma of peaking when it debuts?
Arm is not very profitable
ARM allows 99% of the world's smartphones to use its own chip architecture, but it is not very profitable.
ARM's revenue sources are mainly divided into license fees and royalties, of which 40% are license fees and royalty income accounts for approximately 60% of revenue.
Licensing income refers to the licensing fee that other companies need to pay when designing chips using Arm's architecture. Royalty income is derived from Arm's commission after the chip manufacturer sells the chip.
Some media lamented that Arm’s royalty pricing is really low, and it can be called a “big philanthropist.” According to 2019 data, Arm’s average royalty for one CPU is only
In 2022, the total value of chips based on ARM technology will reach US$98.9 billion, accounting for nearly half of the market share. But ARM’s royalty income is only US$1.68 billion, accounting for 1.7% of the chip value. This is also an important reason why its market share is as high as 99%, but its revenue and profit scale are not particularly large.
On the one hand, because most of the products based on the ARM architecture are MCUs (microcontrollers), the prices are very cheap; on the other hand, ARM takes a commission from the chip price rather than charging for the end product, so the revenue it brings is not high.
In contrast, Qualcomm’s method of generating revenue is also “tax collection.” Take the exclusivity agreement signed between Qualcomm and Apple in 2010 as an example: Qualcomm pays Apple $1 billion per year in exchange for the exclusive right to supply iPhones; but Apple pays patent fees to Qualcomm:
Arm wants to raise prices to make money
In the field of mobile phones, there is a famous "Qualcomm Tax", which refers to Qualcomm's patent fees. It is not calculated based on the number and value of the patents used in the mobile phone, but is calculated based on a certain proportion of the price of the mobile phone.
This charging model has always been controversial, so Qualcomm has been investigated and fined by antitrust agencies in many countries, but Qualcomm's model remains unchanged because it can maximize profits. Qualcomm has achieved rapid growth in revenue and profits through admission fees, high fees for chips and patent licenses.
Qualcomm's pricing model is based on a percentage of the cost or selling price of the entire device using Qualcomm's intellectual property (IP), not just the components used to directly support wireless communications. This means that regardless of whether the device contains Qualcomm's wireless communication technology, as long as the device uses any of Qualcomm's IP, Qualcomm will be paid a licensing fee based on a certain percentage of the overall cost or sales price of the device.
Clearly, Arm sees similarities in its market position and that of Qualcomm
Starting in 2022, Arm issued an ultimatum, saying that it would completely change the charging method. Judging from the charges after Arm changed its licensing model, the licensing fee used to be 1%-2% of the chip price, but now it has been changed to
A conservative estimate is that excluding Apple mobile phones, if Arm directly charges terminals, it will charge US$12, US$6 and US$3 for the high-end, mid-range and low-end market segments respectively.
Some analysts believe that Arm’s dominant position in the architecture field gives it the ability to flexibly implement various strategies. The “Qualcomm tax” strategy can allow Arm to increase sales for terminals, but only if Arm’s pricing strategy will be accepted by the market.
Will anyone pay for it?
Arm’s current unshakable position on the mobile side comes from “ecology”: that is, how many downstream customers are willing to use Arm architecture to design chips. If Arm's "tax rate" is too high and prompts downstream chip companies to find new architecture solutions, a large number of customers may leave.
It can be seen from the lawsuit between Arm and Qualcomm in 2022 that major customers are already wary of the Arm ecosystem: Arm accused Qualcomm of using Arm's intellectual property without permission because Qualcomm acquired a company called NUVIA (engaged in Arm architecture CPU development) in 2021. After the acquisition is completed, Arm hopes to re-sign a licensing agreement with Qualcomm for NUVIA products to increase fees, but Qualcomm is obviously unwilling.
The two giants disagreed, and Arm once threatened Qualcomm to terminate all licensing agreements. Although it was put into practice, this obviously made Qualcomm and all major Arm customers start to be wary of it.
Industry insiders analyze that price increases will accelerate some of ARM's partners to escape the ARM ecosystem and embrace X86, RISC-V and other ecosystems.
The open source and free RISC-V architecture is eyeing it and is constantly trying to break into ARM's existing customers.
The RISC-V architecture has become a "rookie" in the field of chip architecture by virtue of its advantages of open source, simplicity, and modularity. The open source nature of RISC-V has attracted the attention of many companies, especially for small companies and start-ups, as it can more easily obtain chip design authorization, thereby reducing costs.
ARM also mentioned in the prospectus,
Fundamentally speaking, ARM cannot make big money, probably because it does not have enough say in the industry chain. Some analysts pointed out that in the entire industry chain, the most profitable ones are the chip companies that control the software ecosystem. They directly determine how competitive a certain chip is in the market.
ARM has always been in a neutral position, and its architecture standards are open to licensing by major companies, causing its position to be unstable. On the other hand, its competitor Intel not only designs IP, but also owns its own chip factory. It monopolizes the ecosystem by forming the Wintel alliance with Windows, thus gaining control of the industry chain.