ARM Marketplace

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ARM Marketplace

by Nancy Nicolaisen

Docid: 00021362

Publication Date: 1708

Report Type: MARKET

Preview

A bit more than a year ago, ARM was the breathtakingly
dominant player in the most fundamental technology market space of the
21st century. That has changed. Now it is
a

breathtakingly dominant player in the most fundamental technology market
space of the 21st century, aligned with the largest single-focus
aggregation of private investment capital ever assembled.

Executive Summary

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As a company, ARM exclusively specializes in creating intellectual
property (IP) in the form of designs for CPUs, micro controllers, graphics
processors and the like. ARM does not produce physical products, and in
this it is unique. Here’s an illustration of what this means in terms
of market dynamics: Graphics chip manufacturer NVIDIA is “fabless,” which
means it designs components, contracts the manufacture to a chip foundry, and
then derives revenue from selling the finished processors. ARM isn’t
just fabless. ARM generates 100 percent of its revenue by licensing
original component designs, workflow tools, and consulting support to
clients. ARM is strictly an intellectual property enterprise.

ARM clients use and customize ARM IP to build out their own proprietary
chip and product solutions across the full spectrum of the technology
stack and across a vast array of niche markets. ARM partners span the
gamut from custom chip foundries to consumer-facing device and software
innovators. ARM’s non-competing business model has been key to rapid
advances in personal mobility products, a niche where smartphone vendors
increasingly face the competing challenges of compressed development
timelines and the need to create distinguishing feature sets. Licensing
ARM IP reduces risk and time to market for such devices, which often
require custom processor implementations. In addition to offering greater
creative development potential than device designs based on off-the-shelf
CPU parts, customized ARM processor designs can be built in several major
ARM licensed chip foundries. This gives mobile device vendors three
crucial advantages:

The exact design and implementation of processor technology is known.
The device vendor has full control over a processor design’s lifespan.
The processor can be built in more than one foundry, which protects
against supply chain interruptions.

Prior to its 2016 acquisition by Softbank, ARM itself created no
physical product implementations and did not participate in consumer
markets in any fashion. The company was exceptionally well
positioned to collaborate with its customers. In fact, ARM frequently
partnered with niche leaders and thought leaders to create tailored
solutions for innovative use cases. These cooperative efforts, in turn,
help continually improve the broader ARM product, tools, and support
services suite.

These and many other demonstrated advantages made ARM the dominant
foundation layer for most mobility technologies, not just personal
entertainment and lifestyle devices. Portable medical devices, mobile
payment solutions, automobile infotainment consoles, smart cards,
self-aware infrastructure, and “smart building” systems are all largely
built on ARM designs.

Changing Times for ARM

In late July 2016, ARM was quietly acquired in a $32 billion all cash
deal by Softbank, the third largest company in Japan. In February
2017, Softbank Group Corp. (SBG ) closed the first round of investment in
the Vision Fund, a technology venture fund that aggregated $100 billion USD. Investor participation is reported to include Saudi Arabia ($45
billion); Softbank ($25 billion); and Apple, Qualcomm and Oracle ($1
billion each). Abu Dhabi’s Mubadala Development Corporation was also
rumored to be considering participation in either the first or later
rounds of Vision Fund fundraising.

Softbank’s high flying CEO Masayoshi Son has a bold and expansive vision
for SBG Group (including ARM and its catalog of IP) and the Vision
Fund. Bringing to bear vast financial and technological resources,
Son has stated his intention to dominate the direction and future of the
Internet of Things (IoT), artificial intelligence (AI), robotics, mobility,
communication networks, the cloud, the consumer facing Internet and finance.
While on the one hand $100 billion is a lot of chips, that is also a lot of
bets.

This may explain why one of the new fund’s first acquisitions was not a
tech company but a private investment company, Fortress Investments, with
over $70 billion in assets. Fortress has a somewhat checkered history,
having nearly blown up the 2010 Vancouver Olympics by defaulting on
commitments to the City of Vancouver and others.

Rajeev Misra, an alumnus of Fortress, has been chosen to head the SBG
Vision Fund. Among the titles in Misra’s long investment banking
resume: Head of Credit Derivatives at Deutsche Bank AG and seven years at
Merrill Lynch in Derivative Marketing and Trading. Credit
Derivatives are financial and legal instruments that transfer the risk of
default and associated losses to something or someone other than the
lender and are largely regarded as a factor in the economic downturn of 2007
and 2008.

Market Dynamics

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The key to understanding 2017 market dynamics in the IC, CPU, and System on a
Chip (SoC) space in which ARM competes is pretty well summed up in this set
of statistics:

To date, more that 100 billion ARM chips have shipped.
The next 100 billion will ship by about 2021.
Over 95 percent of the world’s mobile devices are built on ARM intellectual
property.

Softbank CEO Masayoshi Son made clear his commitment to the Internet of Things at
the World Mobile Congress immediately after completing the ARM
acquisition. He expressed his belief that ARM would ship 1 trillion IoT devices over the next twenty years. Equating the parts to human
brain cells, Son predicted the parts would eclipse the aggregate total of
human brain cells by 2018.

“This is why I spent $32 billion to acquire ARM,” said Son, explaining his
vision of a ubiquitous, artificial intelligence powered IoT with an IQ of
10,000 – roughly 1000 times “smarter” than a typical human being.

For ARM (also Softbank and the Vision Fund), the objective going
forward is to establish dominance in all aspects of the Internet of Things. This isn’t mere bravado. ARM has committed to a
course of action that will propel its IP to unprecedented global
dominance. It starts with recruitment of academics and entrepreneurs.

No Up-Front Costs For Innovators

The ARM DesignStart program eliminates up-front costs and fees for many
key prospective developers. Though this program offers a few distinct
compensation scenarios, for purposes of this discussion the most
important of them allows developers and innovators full access to
tools and technologies for the ARM Cortex processor family in exchange
for future royalties.

DesignStart is virtually guaranteed to attract huge numbers of innovators to
ARM technology at what is essentially a “soft cost”
for ARM. It is an ingenious form of venture capitalism, as most projects of this type will yield a future revenue stream for SBG or the
Vision Fund. Some of these will be minimal, but there will also
likely be a couple of “Unicorns” among them. ARM will very literally own a
piece of the emergent spaces it occupies in this way, enjoying both
a royalty position and ownership of the foundation IP.

This, however, will also mark the end of the decades-long strategy of not
competing with or among its customers.

Crowd Sourcing Brilliance

One of the canniest moves in the new ARM outreach to innovators is its
direct, aggressive appeal to higher education. ARM is targeting
academic researchers, thought leaders, and, most particularly, teachers. This
strategy makes it easy – very easy – to obtain resources for
training beginning engineers and designers, providing no- or
low-cost access to ARM IP and development tools such as fully prepared curriculum
materials, lecture slides, and guided lab materials. They also
work closely with active programs to showcase successful academic research
and development projects. If there is one enduring lesson that can be taken
from a study of the evolution of computing technology, it would have to be that
innovation creates irreversible dominance in a market space by
winning early adoption among thought leaders.

Market Leaders

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Bearing in mind that until mid-2016, ARM’s only business was creating and
licensing IP and that more than 95 percent of all mobile devices are built
on ARM technology, it really begs the question as to whether “Market
Leaders” should be plural if the discussion centers on mobility. It
is, however, reasonable to examine the meaning of SBG’s intention to
dominate many, many other niches. If successful, this campaign would extend
and consolidate the dominance of ARM technology across not just existing and
emergent market spaces, but many that have yet to be conceived. It is
difficult to overstate the disruptive potential here.

For the broader community of small ARM developers and innovators, this
means barriers to entry, exposure to entrepreneurial risk ,and time to
market will fall dramatically. In a very practical sense, financial, corporate,
and industrial "gatekeepers" are losing their once rigid grip on the resources
that a good tech endeavor requires to become a profitable tech endeavor.

For people engaged creativity but with few resources other than energy,
drive, and talent, ARM’s recent initiatives democratize opportunity down into the lowest layers of the technology stack. When any
bright dreamer can realize an idea that embraces not just
groundbreaking software but also custom silicon, a lot of doors open. This isn’t just an opportunity for tech savvy people. It is a wide
open invitation to the person who has a
concept. What is completely unique about this in the spaces that ARM, SBG,
and the Vision Fund are targeting is that there is no upper boundry on
what a very small group could create.

To get a sense of the implications, let’s make a comparison to Amazon’s
businesses of today. While Amazon is certainly a behemoth, going
forward it faces very real limitations because a lot of its business model
is based on commerce in tangible things. Commerce is a very, very
old idea that is inextricably entwined with cultural context and human
sentiment. Right now, among consumers there is an emerging sentiment that
for many things, a purchase experience is better “hands on.” How do
textiles feel? How does clothing fit? What color is it
really
? Many people consider shopping to be a social experience and a form of
entertainment. In fact, brick-and-mortar merchants have long been
aware that many online shoppers validate choices in stores and
then
buy
online if the price is much better.

Amazon, like big box stores before it, wins mostly on price and
economies of scale. Going forward, Amazon has very real limits
because it is essentially just a new way of doing something very old. A
cultural shift in perception or a new trend in consumer sentiment could
seriously dent Amazon’s dominance. It is hard to predict these things because
they are long wave events that build slowly, broadly, and then break like a
tsunami when they emerge.

By contrast, SBG is plowing its resources into creation of a
vastly intelligent Internet of Things which is aware and capable at the
edges, nearest the user. This is completely unoccupied space and
simply a re-imagining of something you always did (shopping, making
travel reservations, parallel parking, etc ). It will create new things, new
services, new tools, and a new culture around itself.

Market Trends

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AI and IoT Move Forward in Tandem

When Masayoshi Son completed the ARM acquisition in 2016, he made clear that
it was part of a larger vision based on the development of an Internet of
Things with deep intelligence. The key to this objective is moving the
intelligence out of the cloud and right to the edge of a network, in
proximity to people who will use it. Achieving this would deliver vast improvements in security, privacy, and the ability to provide
life changing and life saving services to almost anyone, anywhere. It
presents a very challenging problem, though, because artificial intelligence
and machine learning are both heavily computational. In fact, to date,
the better the AI/ML system, the steeper the demand for compute power and
power consumption. Son’s vision will require edge node devices that
are small, fast, power efficient, and stable in all sorts of circumstances.

ARM is actively pursuing Son’s goal, pushing the capability of its most
recent generation of Cortex processors. The power efficient Cortex
family will have a key role in boosting decentralized AI performance. Expect to see:

A 50-fold performance increase in the next three to five years.
A dedicated instruction set to optimize AI performance intensive tasks.
Multicore functionality and flexibility of configuration in a single
compute cluster.
A security architecture that can effectively protect an SoC device
positioned at the edge of a network.

How Much Can Son Invest In the Grand Plan?

The 2017 closing of the first round of investment in Son’s technology
venture fund aggregated $100 billion USD, including $45 billion USD from Saudi
Arabia. It is worthy of note that the Saudis contributed nearly half
of the first round capital. As we go to press, the first ever
IPO of ARAMCO (the privately held Saudi oil company) is about to be
completed. It is expected to net around $100 billion USD.
About five percent of ARAMCO shares are offered in this sale. The Saudis are
certainly (and wisely) long game thinkers regarding the carbon bubble.
As climate change concerns grow, they and many others in the carbon space
are looking for ways to monetize oil reserves and infrastructure that are
in danger of becoming stranded assets. Son’s fund is a unique and
perfect fit because his target investments could productively absorb
investment on the scale the Saudis must identify as they contemplate a
post fossil fuel global economy.

Outlook

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Long Range Forecast: Disruption for Corporatocracy

In a near term, there are a lot of unknowns around the
future of SBG and Son’s grand plan. Longer term, SBG, ARM, and the Vision
Fund’s strategies will certainly remove many barriers to entry for tech
entrepreneurs. However, if Softbank and its partners succeed in guiding the
evolution of IoT and AI technologies as they plan, it could mean big, big
things, even of outside businesses directly related to its interests.

If you look at this from Son’s contrarian perspective, it becomes plain that
many huge, multi-national corporations exist precisely because they have
been effective gatekeepers. They have been able to use vast resources
to keep others from succeeding in their market space. The resources at issue
usually come down to having money or having unusual access to money. In the
twentieth century and before, it took a lot of talented people a long time
to create breakthrough technologies. Big financial resources were crucial to
these undertakings.

On the other hand, Son and SBG propose to give academics
and innovators no-up-front cost to access tools and technologies that
could leverage what is arguably the most productive and valuable body of IP in the
history of technology. This can dramatically reduce risk and time to
market for creative thinkers and, in some cases, will facilitate access
to cash in what may be the most level playing field ever seen in scientific
and entrepreneurial endeavor. How relevant is a huge corporate structure in this
scenario?

We’ve seen automation decimate the ranks of “blue collar” workers, but Son’s
model could dramatically change the value of “corporate bigness” in a
much broader competitive equation. Flatter, smaller organizations will be
here soon.

Web Links

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ARM: http://www.arm.com/
Softbank: http://www.softbank.jp/en/corp/

About the Author

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Nancy Nicolaisen is the author of hundreds of articles
that help organizations recognize emergent opportunities in technology
trends. She is a former Computer Science Professor, specializing in the
design of solutions based on mobile connected devices and the author of
four software engineering books that have been reproduced in several
languages.

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