Arm seeks to raise prices ahead of hotly anticipated IPO

Arm is seeking to raise prices for its chip designs as the SoftBank-owned group aims to boost revenues ahead of a hotly anticipated initial public offering in New York this year.

The UK-based group, which designs blueprints for semiconductors found in more than 95 per cent of all smartphones, has recently informed several of its biggest customers of a radical shift to its business model, according to several industry executives and former employees.

These people said Arm planned to stop charging chipmakers royalties for using its designs based on a chip’s value and instead charge device makers based on the value of the device. This should mean the company earns several times more for each design it sells, as the average smartphone is vastly more expensive than a chip.

The changes represent one of the biggest shake-ups to Arm’s business strategy in decades, at a time when SoftBank chief executive Masayoshi Son is seeking to drive up Arm’s profits and attract investors to its impending return to the public markets.

“Arm is going to customers and saying ‘We would like to get paid more money for broadly the same thing’,” said one former senior employee who left the company last year. “What SoftBank is doing at the moment is testing the market value of the monopoly that Arm has.”

SoftBank, which acquired Arm for £24.3bn in 2016, plans to retain a majority stake following the IPO. It was aiming to start pushing through the pricing shake-up at the chip designer by as early as next year, but has so far been frustrated by customers’ reluctance to accept the new arrangement.

MediaTek, Unisoc and Qualcomm, and multiple Chinese smartphone makers including Xiaomi and Oppo, are among the companies that have been made aware of the proposed change to pricing policy, according to several people familiar with the talks.

The Cambridge-headquartered company licences its designs to various chipmakers for them to use to make the semiconductors found in smartphones, computers and cars. It charges a licence fee for obtaining its blueprints, and then a recurring royalty for each chip shipped.

Arm has also become more aggressive in pushing price increases within its existing sales model for royalties and licences over the past year, particularly for customers making chips for smartphones, where it has a dominant market position, according to people with knowledge of the recent moves.

Arm has been locked in a bitter legal battle with its largest customer, Qualcomm, since the second half of last year, accusing the mobile chipmaker of using its intellectual property without permission.

In its counterclaim, the chipmaker alleged that Arm had told “one or more of Qualcomm’s customers” that it would cease licensing central processing units [CPU] to all chip companies and would only provide licences to device makers themselves.

According to the new business model being presented by Arm, royalties would be set according to the average selling price (ASP) of mobile devices rather than that of the chips. The changes will mainly involve Arm’s most prominent “Cortex-A” designs, essential for the development of smartphone processors.

Charging based on device price is a widespread practice across the telecoms equipment market, with Qualcomm, Nokia and Ericsson all using a similar model for their patents. The problem for Arm is that it is attempting to change its pricing strategy long after it established a different sales model.

The average price for a smartphone computing chip is about $40 for Qualcomm, $17 for MediaTek and $6 for Unisoc. Arm charges royalties of about 1 to 2 per cent of the value of each chip sold based on its designs, according to Sravan Kundojjala, an analyst at TechInsights.

By contrast, the average smartphone sold for $335 in 2022. While it is unlikely Arm would seek as much as 1 to 2 per cent of the value of each device, those familiar with the matter said the company would set its new pricing in a way that significantly increases overall earnings.

“The [royalty] amount will be at least several times higher than what Arm gets now,” said an executive from a leading Chinese smartphone maker which has so far refused to back the proposed plan. “We are told that they hope such changes could start from 2024.”

Some of Arm’s customers, including Apple, are both chipmakers and device makers, and have special licensing and royalty agreements with Arm. The iPhone maker is not involved in discussions about the change to Arm’s business model, said executives with knowledge of the company’s recent discussions.

Arm, SoftBank, Qualcomm, MediaTek, Unisoc, Xiaomi and Oppo declined to comment.

Son is relying on a blockbuster Arm IPO to help mount a turnround at SoftBank, which has suffered heavy losses over the past year as the value of its tech investments was hammered in a broader industry downturn.

Son announced last year that he would step back from day-to-day operations at SoftBank to devote himself to turbocharging Arm’s growth.

People close to the billionaire said he feels Arm has taken a smaller slice of the industry profits over the past decade than chipmakers such as Nvidia, Broadcom and Qualcomm, especially considering how crucial and ubiquitous its designs are in mobiles.

Investors in the US, UK and Japan have told the FT they have applied valuations to Arm of between $30bn and $70bn. They say the broad range stems from the difficulty in identifying any comparable companies, and a lack of clarity over the company’s precise growth strategy in recent years.

For several years under SoftBank’s ownership, Arm posted stagnating revenue and falling profits. Arm’s costs increased from $716mn in 2015 to $1.6bn in 2019, according to SoftBank data. Revenues gained 20 per cent to $1.9bn over the same period, while profits fell almost 70 per cent to $276mn by 2019.

It has since reversed its fortunes, posting a 35 per cent rise in revenues to $2.7bn in 2021, the latest date for which there are annual figures, and a 68 per cent rise in adjusted earnings to $1bn.

Additional reporting by Qianer Liu in Hong Kong and Leo Lewis in Tokyo