SoftBank: Oi, we paid $32bn for you, when are you going to strong-Arm some more money out of your customers?

Arm was pressured by its owner SoftBank to jack up its processor core licensing fees for some of its customers in an effort to squeeze more money out of its $32bn buy of the British chip designer, sources say.

According to those who spoke to Reuters, the licensing price rise was steep: four times the usual cost in some cases.

Those claims marry up with rumors The Register has heard since late last year from former Arm employees: that SoftBank is leaning on Arm to demand more from its customers, which license the processor designer’s blueprints to fabricate their own system-on-chips. One person told us SoftBank’s management was astonished Arm wasn’t charging clients more for its cores.

Licensing in the Arm world is not too simple. For your typical system-on-chip, first you need to obtain a license from Arm, which costs a decent whack of money, in exchange for access to the chip designs and its engineers. Once your system-on-a-chip or processor leaves the factory and ships in devices, you’re expected to pay Arm a royalty per agreed unit. Licensing and royalty costs vary from client to client depending on their circumstances, and Arm is extremely secretive about the whole process. Every so often, it offers the public a glimpse of the costs involved, such as in the form of its Flexible Access program.

Alternatively, Arm has in the past sold an expensive architectural license to a customer, which grants that client permission to design their own Arm chips that are compatible with the architecture.

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One source familiar with the negotiations told The Register there was no way customers, particularly those making microcontrollers and tight system-on-chips, were going to put up with big cost increases, whether it’s to the base license or per-chip royalties, for long especially if the technology does not match the steeper price. It is claimed the hikes have driven some customers into considering dumping the Arm architecture for something else – we’re guessing RISC-V. Arm has launched various offerings to counter lower-end open-source royalty-free RISC-V CPU cores.

A lot of Arm customers make system-on-chips for embedded electronics and small, low-power, low-cost devices where margins are already quite thin. Expecting them to pay higher licensing costs, or even a few more cents or dollars per core, can have a huge knock-on impact when you’re talking significant quantities. In the final quarter of 2019, Arm customers, we’re told, shipped 6.4 billion Arm compatible chips. Reuters noted that, in its latest financial year, Arm’s licensing revenues were $582m, up 6.4 percent year-on-year, while its incoming royalties totalled $1.08bn, down 1.5 per cent.

As you can see, that works out to pennies in royalties per chip, on average. One source told us Arm was faced with the choice of upping its licensing costs to make up for the low royalties, or increase its royalties.

Arm’s intellectual property sits within the semiconductors in the vast majority of the world’s smartphones, tablets, network-connected devices, battery-powered gadgets, and many other things, and for that reason SoftBank paid an eye-watering $32bn for the British-born biz back in 2016.

Yet it seems SoftBank appears not to have understood the chip universe, imagining that a majority share in a market provided it the opportunity to reap massive profits. It also thought an era of 5G-connected Internet-of-Things devices would mean a vast increase in chips shipped, but that time has still to come.

So, um, money…

Now SoftBank is reportedly looking at selling the chip biz off to recoup its investment and free up capital, especially given its poorly performing massive investments in WeWork, Uber and others. Goldman Sachs has apparently been hired to look at the possibilities, and SoftBank’s COO is talking to the press about getting “most of the value” of the company, potentially by taking it public. Arm also just announced it planned to jettison its Internet-of-Things device management cloud operation.

Arm declined to comment. ®

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