ARM Designs One of the World’s Most-Used Products. So Where’s the Money?

ARM Designs One of the World’s Most-Used Products. So Where’s the Money?

By Ashlee Vance February 04, 2014

Most people have heard of Intel (INTC). The company, which makes the chips that power the world’s PCs and servers, pulled off one of the great marketing triumphs of the past 50 years with its “Intel Inside” campaign. About 400 million computers containing Intel chips are expected to be sold this year.

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Few people have heard of ARM Holdings (ARMH), even though sales of devices containing its flavor of chips are projected to be 25 times that of Intel. The chips found in 99 percent of the world’s smartphones and tablets are ARM designs. About 4.3 billion people, 60 percent of the world’s population, touch a device carrying an ARM chip each day. That’s an astounding number considering that only slightly more—64 percent—have access to basic sanitation. Chief Executive Officer Simon Segars says the 50 billionth product containing an ARM-designed chip shipped during the fourth quarter of 2013, and he expects that number to double in the next few years. ARM, based in Cambridge, England, reported sales for the year were up 22 percent from 2012, and its U.S. shares have been on a five-year tear, rising roughly tenfold, to $44.44, as of Feb. 5.

ARM chips can be found in every iPhone and iPad, and most Kindle (AMZN) e-readers and Android devices. Given that reach, ARM makes what can seem like an absurdly small amount of money. The company averages pennies on each smartphone sold with its chip designs inside, while Intel makes tens to hundreds of dollars on each of its chips. Last year marked the first in which ARM took in more than $1 billion in revenue. Intel, seen as a laggard tied to the languishing PC market, made $52.7 billion.

So why isn’t ARM raking it in? The company began 24 years ago with a dozen or so engineers recruited by Apple (AAPL) to design a chip for the Newton, an early handheld device. From its relatively isolated headquarters, ARM focused on low-power chips formobile devices few people used, teaming up with other companies whenever possible. While Intel manufactures its own chips, ARM licenses its designs to companies such as Apple, , which customize the chips and pay contractors to make them. Intel has “spent a long time building that brand to create a perception with the consumer that it’s worth paying more for a product that’s got their chip in it,” says Segars. “We haven’t really bothered with that. We’ve bothered on making it small, making it low-power, and building a big ecosystem that thrives on choice.”

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Over time the computing market swung in ARM’s favor, and its cheap, efficient chips took off—first in phones from Nokia (NOK), and then in those from all the major brands. Because of its business model, though, ARM missed most of the upside, while its customers thrived. Smartphone chip maker Qualcomm, for example, grew to a market value that rivals Intel’s. “ARM has never made money commensurate with the amount of disruption they have caused,” says Peter Levine, a partner at venture capital firm Andreessen Horowitz. “But its customers have.” (Bloomberg LP, which ownsBloomberg Businessweek, is an investor in Andreessen Horowitz.)

Segars, a 22-year ARM veteran who took over as CEO last summer, now plans to take on Intel. He isn’t trying to play catch-up by building mass chip-production facilities. Instead, he’s aiming to expand ARM’s business and improve its margins by pushing into Intel’s home turf of PCs and servers. Google (GOOG) has teamed with Samsung,Hewlett-Packard (HPQ), and other PC makers to produce ultracheap Chromebook laptops that run on ARM chips. At the same time, a handful of companies, including Samsung and Nvidia (NVDA), plan to begin selling low-power, low-cost server chips based on ARM designs. Their models will be targeted at Web companies such as Google and Facebook (FB) that need tens of thousands of servers for their data centers.

These moves are a direct threat to Intel’s way of life. The company’s server chips are its most profitable, and their sales have boomed since the rise of cloud computing. The mobile explosion has contributed to this, as smartphones and tablets constantly pull information from data centers. Sensing an opportunity, chipmaker Advanced Micro Devices (AMD) is customizing an ARM server design to battle Intel, its old PC processor foe. Intel spokesman Bill Calder says, “The reality is that no large companies are switching over, and they may never. If you take the sheer scope of Intel’s business, I think you would be hard-pressed to argue that ARM Holdings can go after every piece of that.”

ARM-designed chips are in millions of cars, TVs, medical devices, smart thermostats, and wearable gadgets, but the PC and server markets will be tough for the company to crack. Its partners, including Qualcomm, with its so-called Smartbooks, and Microsoft(MSFT), with its Surface RT, have failed before to sell cheap ARM-based computers. Intel already sells a low-power chip that can compete against ARM’s nascent designs. It finally has a competitive mobile chip, too. Intel has ramped up its own offense, wooing mobile and smart-device makers in Asia.

Segars, a balding, mild-mannered engineer, is trying to engage in hand-to-hand combat against one of the most fearsome competitors in business history. He says he’s up for the challenge but is loath to raise prices. “Our customers have got choice,” he says. “And if we ultimately are too arrogant, too greedy, then it might not be tomorrow, but at some point people will start to exercise that choice.”

The bottom line: With ARM-designed mobile chip sales soaring, the relatively low-revenue company is expanding into Intel’s home turf.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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