InterDigital Inc (IDCC)

[Gamco]

Intel’s Battle With ARM Looking Even Tougher Now

SoftBank’s pledge to invest more in ARM could make it a more potent competitor

By Don Clark
July 18, 2016 4:32 p.m. ET

Competing with ARM Holdings PLC has always posed special problems for Intel Corp. , which has repeatedly tried and failed to crack the British company’s lock on smartphone chip technology. That task could soon get even tougher.

Japan’s SoftBank Group Corp. , which on Monday announced plans to buy ARM for $32 billion, pledged to invest more in the company and help it double its workforce over five years. The extra money for ARM could also be used for acquisitions and internal technology development to bolster the chip designer’s sway in new markets—such as the data center equipment that is Intel’s stronghold.

“If you are Intel, that potentially makes ARM even more potent as a competitor,” said Linley Gwennap, an analyst at the Linley Group.

Indeed, ARM became a big enough threat over the past decade that rumors have frequently surfaced that Intel might try to buy it. But peculiarities that make ARM’s business model so troublesome for Intel also make it unlikely the Silicon Valley giant would consider topping SoftBank’s bid, analysts say.

Buying ARM would put a major chip company like Intel in the delicate position of either selling designs to their direct competitors or discontinuing such dealings, industry executives and analysts say. The latter course, they add, almost undoubtedly would have been opposed by government authorities on antitrust grounds.

An Intel spokeswoman declined to comment.

On the surface, Intel seems a much more powerful company. The chip maker, which invented the microprocessor, supplies those chips to drive the vast majority of personal computers and server systems. Intel, which manufactures chips in its own factories, sells hundreds of millions of chips each year and posted 2015 revenue of $55.4 billion.

ARM, by contrast, developed a popular strain of processor technology that it licenses to other companies for a fee and charges royalties on each chip they sell. Some companies, like Apple Inc., pay for the right to design original chips based on ARM technology. Others purchase complete chip blueprints from ARM, which may be used without modification or combined with other technology of their own.

ARM-based chips originally gained a big foothold in smartphones because of their low power consumption, which helped conserve battery life in handsets.

Intel, eager to reduce its dependence on the slowing computer market, over the years closed the power consumption gap but still largely failed to gain a major foothold in smartphones. One reason is that ARM licensees like Qualcomm Inc. had a lead in wireless communications that Intel has struggled to match. But the bigger reason, Mr. Gwennap and others say, is the sheer number of ARM licensees that compete to keep prices down and add new features quickly.

SoftBank Chief Executive Masayoshi Son on Monday said Intel’s strategy has merits and strengths. “But ARM has a totally different business model and different kind of strength,” he said during a news conference in London.

ARM has spread into many connected devices beyond smartphones. The company estimates that its partners ship more than 4 billion chips based on its technology each quarter, with more than 86 billion shipped since ARM was founded.

But ARM charged relatively low royalty rates—well below a dollar on some kinds of chips—that have brought small financial returns. The company reported less than $1.5 billion in revenue in 2015.

One of the biggest questions about the SoftBank deal is whether it might try to raise ARM’s royalty rates. Patrick Moorhead, an analyst at Moor Insights & Strategy, said that it may do so as new chip designs are introduced—but will likely tread carefully to avoid pushing customers to other technologies.

“You don’t want to make Apple mad,” he said.

At the same time, the fact that ARM would no longer be a public company and likely stop reporting the same detailed financial results might give some customers pause.

“It is not going to be quite as transparent,” said Handel Jones, an analyst at International Business Strategies. “You’d be prudent to look at different options and Intel is one of them.”

Write to Don Clark at [e-mail]
http://www.wsj.com/articles/intels-battle-with-arm-looking-even-tougher-now-1468873935