Trends risks and opportunities
Licensing: slowing growth in the semiconductor industry
As industry growth slows companies look for other ways to grow, such as consolidating with other companies to reduce costs. In 2010, there were several examples of ARM’s customer base consolidating either through acquisition of entire companies or one company acquiring the division of another. An example in 2010 was the merger between Renesas and NEC.
Technology companies can use their patent portfolios to generate additional revenue streams. The majority of patent disputes are resolved with companies licensing their technology to each other either as a one-off payment or as part of a cross-licensing deal. For example, we have recently seen NVIDIA license their graphics patents to Intel.
About half of ARM’s revenue comes from direct sales to semiconductor companies. If there are fewer semiconductor companies, then ARM may have fewer customers to sell to. ARM is exposed to a range of markets including wireless handsets and microcontrollers. Consolidation in these parts of the industry could represent a loss to ARM’s future licensing business.
ARM is developing more functionally capable products and our technology is becoming more widely deployed in a broad range of end markets. Having a more capable product increases the risk of patent infringement, and our success may encourage a patent owner to make a claim against ARM or one of our customers.
Saving cost increases a company’s profitability, even as revenue growth slows. ARM demonstrates to our customers how further utilising ARM technology can reduce costs across their divisions. In consolidating companies, ARM technology is often a standard both companies can integrate around. None of the consolidation we have seen to date has had a meaningful impact on ARM’s licensing opportunity.
ARM has a rich portfolio of patents that is growing as we develop new technology each year. These patents are useful not only in defending ARM technology, but also as potential currency in cross-licensing agreements with other major technology developers. From time to time ARM has entered into patent agreements with third parties.
Mobile: convergence of smartphones and laptops
Smartphones are getting smarter and laptops are getting smaller and more portable, and we are seeing new mobile computing products introduced. This is creating an opportunity for smartphone technology to cross-over into laptops and laptop technology to cross-over into smartphones. Consumers want portable products that keep them connected to their social and business networks, have an all-day battery life and are simple to use.
The main processor in a laptop is typically based on the x86 architecture. It has been announced that smaller and lower-power x86-based chips are being developed that will be suitable for the main processor in a smartphone. There is therefore competition from large companies that have demonstrated advanced technology and well-funded marketing strategies. They are capable of reducing ARM’s market share in smartphone application processors and hindering any market share gains that might be made by ARM licensees in mobile computing.
ARM processor-based chips for mobile computing are significantly lower-cost and lower-power than products available based on x86. ARM’s licensees have already announced chips that are suitable for mobile computers, including tablets, E-book readers and netbooks. The ARM Partnership is working with software companies and OEMs to ensure that a complete ecosystem of PC-class software is available, and that our shared experience in developing portable consumer products enables a new market of low-cost mobile computers. In addition mobile computers contain 3-5 chips that can incorporate ARM processor-based technology, further increasing the opportunity for ARM royalty revenues.
Non-mobile: competing in microcontrollers
Although growing strongly, in 2010 ARM had only about 10% market share of the six billion unit microcontroller market. This market is characterised by a large number of proprietary processor architectures, being developed by many semiconductor companies, who sell very low-cost chips into a highly fragmented end-market.
It could be difficult for ARM to be successful in the microcontroller market. ARM will need to displace many established in-house processor designs. ARM has invested a lot of effort and cost to achieve modest penetration to date. As the microcontroller chips are low-cost, the royalty revenue per device is also lower than other markets.
ARM believes that it can capture a significant proportion of the microcontroller (MCU) market as demonstrated by recent strong unit growth rate. ARM processors are already 30% of the 32-bit MCU market and our strategy is to develop technology that enables companies currently using 8-and 16-bit MCUs to migrate to ARM-based chips.
The Cortex-M processor family was specifically developed for the MCU market and, by the end of 2010, had been licensed more than 80 times. In addition, the ARM community is working to ensure that as well as a broad range of ARM processor-based chips, all the software and software tools are available for end customers using established microcontroller distributors.
Beyond processors: outsourcing by semiconductor companies
As semiconductor manufacturing has become increasingly expensive, most chip companies are considering whether to outsource their manufacturing facilities to specialist foundries. This creates a new opportunity for chip companies to license in their physical IP R&D. As all chips require physical IP technology, this could be a larger market than processors.
Currently, most major chip companies develop their physical IP using their in-house teams. Even for companies that have outsourced manufacturing, the rate at which they want to license in physical IP is unclear. The foundries may choose to develop the physical IP. This could add more value to their customers and help create “lock-in” by making it harder for the customer to change foundry. There are also other physical IP suppliers who compete in this market, some with a similar scale and scope as ARM.
ARM is a proven supplier of processor technology to most of the major chip companies in the world. We have developed the most advanced physical IP technology and we were market leaders in the physical IP market in 2010. Currently this is a small market that we believe will grow over the medium-term as more major semiconductor companies outsource their manufacturing. ARM can demonstrate significant cost savings for our customers if they license physical IP from ARM; and with the combination of advanced physical IP and processor technology we have an unmatched offering.