When Masayoshi Son tried to convince investors of the wisdom of buying one of the most successful chip companies in the world in 2016, the SoftBank chief had one clear message: “For the age of the ‘Internet of Things’ I think the champion is arm.”
But the concept of connecting billions of everyday and industrial devices to the Internet has come about much more slowly than expected.
Son’s drive to conquer 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 was unraveled last week.
Arm remains the dominant player in chip design for smartphones, still the most ubiquitous form of computing, but a source of much slower growth in recent years. Ahead of an IPO that could happen as soon as possible this year, the company is racing to strengthen its position in new markets it has so far under-exploited, while trying to boost profits to create a new one. group of investors.
Rene Haas, Arm’s new chief executive, told the Financial Times its products were now “much more competitive” in data centers and automobiles than when SoftBank bought the Cambridge-based company.
“Making trade-offs about where to invest, where not to invest… those are the trade-offs that public companies and even private companies have to make every day,” he said. “The company is in top shape.”
When Son took the lead in the $31 billion purchase of Arm, he saw it as a bet on the future of the entire technology industry, which at the time crystallized around the IoT concept. He firmly pushed the executive team to design chips for this future of machine connectivity.
Five and a half years later, it is becoming increasingly clear that the Internet of Things gamble was a costly setback. In addition, it distracted Arm from attacking Intel’s dominance in the much larger data center market.
While Son’s vision clashed with reality, SoftBank quietly revised its market calculations. A 2018 presentation predicted that by 2026, the IoT controller market would be worth $24 billion and the server market $22 billion.
But a similar 2020 presentation predicted that by 2029, the IoT chip market would hit just $16 billion, while the server market — of which Arm had captured only a 5 percent share so far — would hit $32 billion. The Japanese tech group has also revised down its estimate of the value of the IoT market, from $7 billion in 2017 to $4 billion in 2019.
Tudor Brown, who co-founded Arm in 1990 and served as president of the company for 22 years, described the heavy investment in IoT as “strange” as “there would never be money in that market.” He added, “By focusing on that, they didn’t focus on the big prize, which is the server.”
In Arm’s regulatory filings in December, the company made a strong case against pursuing an initial public offering and for a sale of Nvidia, outlining how shareholder pressure could affect the company’s ability to invest in its data center and PC assets. markets, which were “hard to crack” and where it had made only “limited advances”. Investors in the public market would “demand profitability and performance,” meaning cost savings and a lack of financial strength to invest in innovative new businesses, the Arm filing said.
“We’ve always felt that the Nvidia acquisition would give us a fantastic opportunity to invest and do more,” Haas said. “Now that we are on our way to the [IPO]I have a very good feeling about our prospects.”
Son also underestimated how expensive it can be to deliver innovation in semiconductors, even though Arm doesn’t manufacture its own silicon. According to data from SoftBank, Arm’s costs rose from $716 million in 2015 to $1.6 billion in 2019. Revenue rose 20 percent to $1.9 billion, while profits fell nearly 70 percent in 2019 to $276. million.
Arm has recently embarked on course correction, has invested more in the growing server and PC market over the past four years and has won allies such as Amazon Web Services, which now has the third generation of its Arm-based Graviton chip, and Apple, that is shifting its entire line of Mac computers from Intel to its own M1 processors, built on Arms designs.
Haas admitted, “While IoT is still a hugely important area for us, we’re very, very focused on the computer room,” he said, referring to chips for servers and PCs. He declined to disclose what portion of Arm’s revenue came from areas outside of its core mobile operations, citing the “heavy regulatory process” surrounding the Nvidia deal.
Arm executives claim they are only now beginning to reap the benefits of strategic investments made several years ago. Arm’s chip designs are licensed to semiconductor companies and electronic manufacturers as they begin developing new products; it may take several years for the first design profits to be converted into royalties on product sales.
The company’s royalty income, which accounts for more than half of its total revenue, rose 22 percent in the past nine months, supporting Haas’ claims of a turnaround. These were “numbers Arm has never seen before and higher than before SoftBank,” he said.
“Masa had always said that Arm would one day be a publicly traded company was definitely the goal,” Haas said, adding that now that the Nvidia deal had failed, Arm was “back to its original Plan A.”
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