MW Arm v. Qualcomm: A trial ends - now the fallout begins
By Mike Feibus
Arm's profit-centered push should concern participants in the company's extensive ecosystem
Arm and Qualcomm have become the worst best partners.
Late last Friday afternoon, inside the U.S. District Courthouse in Wilmington, Del., the jury in a bitter case between two computer-chip giants, Arm Holdings $(ARM)$ and Qualcomm $(QCOM)$, handed a win to Qualcomm - with an asterisk.
Qualcomm, the defendant, got most of what it asked. The jury decided that:
-- Qualcomm did not breach the license agreement between Arm and startup Nuvia, which Qualcomm bought three-and-a-half years ago for $1.4 billion, and
-- The processors Qualcomm has built around Nuvia are covered under its own broad license agreement with Arm.
But the jury punted on a critical question - whether the now-acquired startup Nuvia broke the termination clause in its own license with Arm.
Which means the case isn't over.
The termination-clause deadlock gives Arm an opening to have that question - and maybe the other two - re-tried. And despite admonishments from the judge that the two parties should settle out of court, Arm signaled in a statement Friday that it intends to take this fight right back to Wilmington next year.
But even if this legal battle were over, it wouldn't be over. One clear insight to come out of this muddy pool of clause-by-clause contract interpretations is that Arm isn't interested in anything short of a total excision of Nuvia technology - that is, Arm-compatible designs superior to any off-the-shelf chips Arm will have to offer for a time - from Qualcomm's product portfolio.
Stronger Arm
There's a new Arm in town - one that puts profits ahead of partnerships.
That's a particularly drastic demand. But in this legal scuffle with a partner - one in which Arm didn't even request damages - trying to cut off a rival at the knees is flat-out off the charts.
In other words, there's a new Arm in town - one that puts profits ahead of partnerships. This profit-centered push should concern participants in the company's extensive ecosystem - including any company that is:
-- A manufacturer of myriad electronics products, from smartphones and connected thermostats and from car fobs to cars.
-- One of 500 or 600 Arm licensees that together ship about 29 billion processors a year to power those products.
-- A developer building games, social media platforms, hotel loyalty programs and countless other apps that run on Arm platforms.
-- An investor with interest - or considering purchasing an interest - in companies in any of the above areas.
Arm's demands from Qualcomm don't leave much room for negotiation. But after building its whole roadmap around those designs, Qualcomm would never agree to unwind that. And why should they? Strip away the confusing, contradictory interpretations of a couple of clauses in a couple of licensing agreements, and what really happened here? One Arm licensee bought another Arm licensee and started building products around the acquisition.
No misappropriated trade secrets. No back-alley espionage. The acquirer was already privy to every Arm-confidential tidbit held by the acquisition.
Arm could reasonably ask Qualcomm for money to help cover up-front design support for Nuvia, which got a break in exchange for retail-rate royalties on chip sales that never materialized. Alternatively, Arm could ask Qualcomm to balance out Nuvia's low upfront costs in exchange for higher per-unit royalties from Qualcomm.
But that would leave a competitor intact against Arm's full-service chip designs - an area where Arm clearly intends to jack profits.
Qualcomm was Arm's biggest customer for a time, and they made each other a lot of money. But then they both wanted more.
Over the past decade, Arm and Qualcomm have become the worst best partners. Qualcomm was Arm's biggest customer for a time, and they made each other a lot of money. But then they both wanted more.
For its part, Qualcomm wanted industry-leading processor performance, and to pay less on a per-unit basis for it. Increasingly profit-minded Arm wanted to build a bigger chunk of systems - and be paid commensurate with that.
Each companies' desires grew more urgent in the 2010s. Apple $(AAPL)$, Qualcomm's biggest smartphone processor rival, started making its own chips under an Architecture License Agreement, or ALA, with Arm. Even though Qualcomm had an ALA in place, the company was paying more for pre-designed processor cores under an Arm Technology License Agreement, or TLA.
Arm's profit priorities intensified after Softbank (JP:9984) bought the company in July 2016. The tension between the competing goals of Arm and Qualcomm came to a head.
Softbank thought it had an answer to its Arm profit problems in September 2020, when it announced that Nvidia $(NVDA)$ was buying the company for a heart-stopping $40 billion. Qualcomm and others opposed the deal. U.S. regulators listened, convincing Nvidia to drop its bid in February 2022. Softbank then pivoted and took Arm public.
For its part, Qualcomm completed its acquisition of Nuvia early in March 2021. By that time, Nvidia's proposed buyout of Arm was already in regulatory crosshairs. Qualcomm was working toward realizing its dream of supplying processors that beat Apple's best offerings - and paying Arm much less on a unit basis.
Arm's profit squeeze of its partners is just getting started.
During the week-long trial, Qualcomm took the opportunity to lay bare Arm's intent, using Arm-internal emails and chats as well as recorded video depositions from Arm executives. The story that unfolded was of Arm trying to leverage its status as the keeper of a set of instructions that dictate how hundreds of billions of processors operate - all in the name of maximizing profits and even when it meant putting a big partner at risk.
In the short term, there isn't much that Arm's partners can do. They need access to the Arm instruction set in order to link their products to a globe full of smartphones, webcams, thermostats, kitchen appliances, automobiles and laptops - along with the applications that make those systems useful.
But they'd better start working together on a long-run alternative, like the rapidly-rising open-source RISC-V instruction set. Because Arm's profit squeeze is just getting started.
Mike Feibus is principal analyst at FeibusTech, an independent market-research firm in Scottsdale, Ariz. He does not own shares in any of the companies mentioned.
More: Qualcomm is moving fast to boost growth and trim its dependence on Apple
Plus: Qualcomm scores a victory in its dispute with longtime partner Arm
-Mike Feibus
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December 24, 2024 07:51 ET (12:51 GMT)
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