As Masayoshi Son tried to persuade investors of the wisdom to buy one of the world’s most successful chip companies in 2016, the SoftBank chief had a clear message: “For the era of the ‘Internet of objects”, I think the champion be arm.
But the concept of connecting billions of everyday and industrial devices to the internet has been much slower than expected to materialize.
Son’s drive to capture the Internet of Things (IoT) chip design market was the first bet he made on Arm that didn’t pay off. The second was a $66 billion sale of the company to Nvidia that unfolded last week.
Arm remains the dominant player in smartphone chip design, still the most ubiquitous form of computing but a source of much slower growth in recent years. Ahead of an IPO that could come as early as this year, the company is racing to cement its position in new markets it has under-exploited so far, while trying to boost profits to attract a new set of newcomers. investors.
Rene Haas, Arm’s new chief executive, told the Financial Times that its products are now “much more competitive” in data centers and cars than when SoftBank bought the Cambridge-based company.
“Compromise on where to invest, where not to invest. . . these are the trade-offs that public companies and even private companies have to make every day,” he said. “The company is in great shape.”
When Son led the $31 billion purchase of Arm, he saw it as a bet on the future of the entire tech industry, which at the time was crystallizing around the IoT concept. He then pushed the leadership team firmly down the path of designing chips for this future of machine connectivity.
Five and a half years later, it has become increasingly clear that the IoT bet was a costly misadventure. Additionally, it prevented Arm from attacking Intel’s dominance in the much larger data center market.
As Son’s vision clashed with reality, SoftBank quietly revised its market calculations. A 2018 presentation predicted that by 2026, the IoT controller market would reach $24 billion and the server market would reach $22 billion.
But, a similar presentation from 2020 predicted that by 2029 the IoT chip market would reach just $16 billion, while the server market – of which Arm had so far captured only a 5% – would reach 32 billion dollars. The Japanese technology group also revised its estimate of the IoT market value down from $7 billion in 2017 to $4 billion in 2019.
Tudor Brown, who co-founded Arm in 1990 and was an executive at the company for 22 years, described his massive investment in the IoT as “strange” given that “there would never be money on it. Marlet”. He added: “By focusing on that, they didn’t focus on the jackpot, which was the waiter.”
In Arm’s December regulatory filings, the company made a strong case against pursuing an IPO and in favor of selling Nvidia, pointing out how shareholder pressure could stifle the company’s ability to invest in the data center and PC markets, which had been “hard to break into” and where it didn’t. had made only “limited breakthroughs”. Public market investors “would demand profitability and performance,” meaning lower costs and a lack of financial firepower to invest in new, innovative ventures, Arm’s filing added.
“We always thought that acquiring Nvidia would give us a fantastic opportunity to invest and do more,” Haas said. “Now that we are at [IPO]I am very satisfied with our prospects.
Son also underestimated how expensive innovation in semiconductors can be, even if Arm doesn’t make its own silicon. Armaments costs rose from $716 million in 2015 to $1.6 billion in 2019, according to SoftBank data. Revenue rose 20% to $1.9 billion while profits fell nearly 70% to $276 million in 2019.
Arm has recently begun to course-correct, investing more in the growing server and PC market over the past four years, gaining allies such as Amazon Web Services, which is now on the third generation of its Graviton chip. based on Arm, and Apple, which is switching its entire line of Mac computers from Intel to its own M1 processors, built on Arm designs.
Haas conceded: “While the IoT is still an extremely important area for us, we are very, very focused on the computing space,” he said, referring to chips for servers and PCs. He declined to disclose how much of Arm’s revenue came from areas outside of its core mobile phone business, citing the “heavy regulatory process” surrounding the Nvidia deal.
Arm executives say they are only beginning to reap the benefits of strategic investments made several years ago. Arm’s chip designs are licensed to semiconductor companies and electronics manufacturers as they begin developing new products; it may take several years for initial design gains to translate into royalties on product sales.
The company’s royalty revenue, which accounts for more than half of its total sales, has risen 22% in the past nine months, supporting Haas’s claims of a turnaround. These were “numbers Arm had never seen before and higher than before SoftBank,” he said.
“Masa had always said that making Arm a public company one day was definitely the goal,” Haas said, adding that now that the Nvidia deal had fallen through, Arm was “back to the original Plan A.”
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