a model business
ARM has developed a business model designed to deliver sustainable long-term growth. COO Graham Budd describes why the model is increasingly relevant in today’s semiconductor industry.
In 1990, as a small company with great microprocessor technology and a handful of engineers, but with few other resources, ARM needed an innovative business model to get this technology to market and help fund the investment in the next generation of processors. So we developed a model based on partnership with chip companies in long-term business relationships, to create a shared reward for success. The chip companies pay an upfront licence fee to access the processor design and then pay a royalty on every chip that they sell containing our technology.
This business model is an efficient and scalable way for a small company to get a return from its investment in technology without the expense of developing manufacturing capability. The upfront licence fees enabled continued R&D investment for a sustainable technology roadmap, while the royalty opportunity incentivises ARM to work with our customers and build the ecosystem required to help them succeed over the 3-5 years it takes to get their chips into volume production.
The business model is also financially efficient for the semiconductor companies. They pay ARM only a fraction of the cost that they would have incurred had they developed the technology themselves. Some of this cost saving is reinvested in their own R&D innovation and enables faster time to market, whilst some of the saving is passed on to the consumer. As the technology gets more complex and the ecosystem around it gets ever richer, these cost savings continue to increase.
For the OEM companies designing end-products using ARM-powered chips, the business model enables flexibility by encouraging multiple suppliers. It also encourages supplier innovation and differentiation, while still providing the software reuse and scalability benefits of working with the industry standard processor architecture. Our business approach has always included building relationships directly with the OEMs. This helps ARM to better understand future technology requirements for the end product markets, and creates “pull” from the OEMs to the chip companies incorporating ARM technology.
Looking to the future, design complexity continues to rise, impacting development cost, execution risk and time to market. This is driving increased outsourcing of technology development by the semiconductor industry, and the ARM business model scales to support this. More companies are choosing a broader range of ARM technology, feeding through into more ARM-powered end products. In 2010, ARM processor technology could be found in 28% of digital electronic chip shipments, but design wins in the pipeline suggest that our market penetration will be higher in the future.
The business model is very flexible and continues to work well as new types of devices and applications emerge, and different types of companies want access to ARM technology. Although semiconductor companies remain our biggest customers, we also provide ARM technology to OEMs and Operating System (OS) vendors, start- ups and well established companies and universities and technology institutes. As the world’s engineers develop their products around ARM technology this will help to drive our long-term licensing and royalty revenues.
ARM has also extended the business model to cover new technologies, such as our 3D graphics and physical IP products. Each of these technologies generate new licensing opportunities and additional royalty streams from the sale of a chip. Combined with processor technology, ARM is already receiving multiple royalties from the sale of advanced chips into some mobile computing and digital TV applications.
Built around the principles of partnership and shared rewards for success, ARM’s business model continues to play an important part in enabling sustainable business growth as the pace of innovation in digital electronics accelerates.