While Masayoshi Son tried to persuade investors to wisely buy one of the world’s most successful chip companies in 2016, the SoftBank boss had one clear message: “For the era of the ‘internet of things’, I think the champion will be an arm.”
But the concept of connecting billions of everyday and industrial devices to the Internet has been much slower than expected.
Son’s drive to capture the chip design market for the Internet of Things (IoT) was his first bet on Arm and it didn’t pay off. The second is the $66 billion sale of the company to Nvidia that collapsed last week.
Arm remains the dominant player in chip design for smartphones, still the most prevalent form of computing but a source of much slower growth in recent years. Ahead of an initial public offering that could come as soon as this year, the company is racing to establish itself in new markets it hasn’t tapped enough yet, while trying to boost profits to attract a new group of investors.
Arm’s new chief executive, Rene Haas, told the Financial Times that its products are now “more competitive” in data centers and cars than when SoftBank bought the Cambridge-based company.
“Make trade-offs about where to invest, where not to invest… Those are the trade-offs that public companies and even private companies have to make every day,” he said. “The company is in good shape.”
When Son led the $31 billion purchase of Arm, he saw it as a bet on the future of the entire technology industry, which was taking shape at the time around the concept of the Internet of Things. He set out to steadily push the executive team down the chip design path for this future of machine connectivity.
Five and a half years later, it has become increasingly clear that IoT gambling was a costly misadventure. Furthermore, it has distracted Arm from attacking Intel’s dominance in the much larger data center market.
When Son’s vision bumped into reality, SoftBank quietly audited the market. A presentation from 2018 predicted that by 2026, the market for IoT controllers would be $24 billion, and the server market $22 billion.
But, a similar presentation from 2020 predicted that by 2029, the market for IoT chips will reach just $16 billion, while the server market — of which Arm has acquired a 5% share so far — will reach $32 billion. The Japanese tech group also revised its estimates of the value of the Internet of Things market, from $7 billion in 2017 to $4 billion in 2019.
Theodore Brown, who co-founded Arm in 1990 and was the company’s CEO for 22 years, called his massive investment in the Internet of Things “weird” because “there wouldn’t be any money in that market.” Focusing on that, he added, “they weren’t focused on the biggest prize, which is the server.”
In Arm’s December regulatory filings, the company made a strong case against pursuing an IPO in favor of selling Nvidia, explaining how shareholder pressure could stifle the company’s ability to invest in the data center and PC markets, which have been “hard to crack” and where it has “successfully”. Limited” only. Arm’s filing added that public market investors would “demand profitability and performance,” which means lower costs and a lack of financial strength to invest in new, innovative businesses.
“We always felt that the acquisition of Nvidia would give us a great opportunity to invest and do more,” Haas said. “Now that we come to [IPO]I feel good about our prospects.”
Son also underestimated the cost of introducing innovation in semiconductors, even though Arm does not make its own silicon. Arm’s costs rose from $716 million in 2015 to $1.6 billion in 2019, according to SoftBank data. Revenue increased 20% to $1.9 billion while profits fell nearly 70% to $276 million by 2019.
Arm has recently begun to correct course, investing more heavily in the growing server and PC market over the past four years, winning allies like Amazon Web Services, which is now working on the third generation of the Arm-based Graviton chip, and Apple, which is turning its entire suite of Mac computers from Intel to their own M1 processors, built on Arm designs.
“While the Internet of Things is still a very important area for us, we are very focused on the computer space,” Haas acknowledged, referring to chips for servers and computers. He declined to reveal what portion of Arm’s revenue came from areas outside of its core mobile business, citing the “heavy regulatory process” surrounding the Nvidia deal.
Arm executives say they are only now beginning to reap the fruits of the strategic investments made several years ago. Arm chip designs are licensed to semiconductor companies and electronics manufacturers as they begin developing new products; It can take several years for the initial design gains to translate into royalties from product sales.
The company’s equity returns, which account for more than half of its total sales, have risen 22 percent in the past nine months, supporting Haas’ claims of a turnaround. These are “numbers that Arm has never seen before and higher than they were before SoftBank,” he said.
“Massa has always said that having Arm was once a public company is definitely the goal,” Haas said, adding that the Nvidia deal has now failed, and Arm has reverted to the original Plan A.
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