Arm/SoftBank: raising prices will backfire on chip designer

For SoftBank’s Masayoshi Son, improving growth at Arm is a priority ahead of an IPO of the British chip designer. To achieve this, he will raise prices for final users of Arm’s chip designs. Boosting sales at the SoftBank-owned group this way is harder than it looks. It may backfire faster than expected.

Son should expect reluctance from all its design users to accept the new arrangement. These include US chip company Qualcomm and Chinese smartphone makers, including Xiaomi and Oppo.

True, Arm’s plans to alter its royalty programme make some sense. Its original business model charges chipmakers small fees — reported to be about 2 per cent — for using its designs, based on a chip’s value. Charging device makers based on the value of the device — premium smartphone prices can run over $2000 — would add several multiples more in fees.

There are good reasons why Arm has become the global standard — with its designs powering nearly all the world’s smartphones. The processors are energy efficient, using less battery power while generating less heat. Most importantly for clients, they are cheap.

Attractive pricing enables Arm to retain its leading position. China, one of its biggest markets, has long been developing RISC-V, an open-source chip design architecture. Local tech groups have turbocharged investment in this alternative to Arm designs in the past year since US export controls ban them using its advanced US technology. RISC-V processors already appear in simpler devices such as smartwatches.

Arm’s entrenchment in the supply chain and a lack of technical support from open source alternatives mean the price move will boost Arm’s top line. But targeting cash-rich device makers could work against it. Higher costs for device makers will only encourage them to invest in alternative design sources.

In the midst of a chip industry slump, Arm would fetch less than $34bn based on an average industry earnings multiple — far below the $60bn SoftBank reportedly expected last year.

If Son seeks a quick boost for a listing this year, he might have found a solution. But given the longer term risks, finding investors who will stick with Arm is the true problem.