Arm’s New Pricing Strategy and Its Impact

In anticipation of its initial public offering (IPO) in New York this year, Arm is changing its pricing and launching a new customer licensing model to boost revenues.  

Arm is a UK-based semiconductor and software design company. Its primary business is in the design of ARM processors (CPUs), but it also designs other semiconductor software development tools and provides systems and platforms.  

Since 2016, Arm has been owned by the Japanese company SoftBank Group which released its first quarter 2023 financial report highlighting the increase of Arm’s technology adoption across the entire computing ecosystem. Their technology can be found in billions of microcontrollers, almost all smartphones, tablets, gaming systems, and the automotive industry.  

Arm's technology is a vital part of daily life for over 70% of the global population. Additionally, Arm-based chips power over one-third of all processors worldwide, with over 250 billion such semiconductors shipped worldwide as of September 2022, including 8 billion in Q3 of 2022.

In their financial report, Softbank disclosed that 86% of their revenue in 2022 came from only 20 key customers. This high concentration of revenue sources poses a significant risk to the company, prompting a reevaluation of its revenue models.

Arm recently informed several of its biggest customers of a shift to its business model and revenue strategy which will impact many manufacturers. Companies such as Qualcomm, MediaTek, Samsung, and HiSilicon license ARM technology for a 1-2% licensing fee of the chips’ selling price. Now, Arm wants to collect royalties based on the value of the device that their technology is placed in, meaning the device’s average retail value. This means the company will earn several times more for each design it sells since the average price of the end design, such as a smartphone or tablet, is much more expensive than a chip.

There has been resistance from the industry around this change. Device-based pricing is widespread across the telecom equipment market, with many companies using a similar model for their patents. Still, Arm is attempting to change its pricing strategy and sales model, which can pose problems in the market.  

The company's newly established "solutions engineering" team has been tasked with creating a semiconductor that will showcase its technology. This approach imitates Google's method of designing hardware products to showcase the potential of Android and ChromeOS and help other businesses enhance their devices.

Moreover, the recent agreement between Arm and Intel, in which Intel becomes one of Arm's primary manufacturers, raises questions about Arm's potential long-term strategy to offer manufacturing services to specific customers. This move could significantly alter market dynamics and give Arm direct control over the supply chain.

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