The ARM-Qualcomm Dispute: A $940M Chess Game

$ARM says bye to $QCOM ?

Author

Arjun Lohan
October 23, 2024

Welcome to The Financial Engineer Newsletter.

Today we're diving into a breaking development that could reshape the semiconductor industry: ARM's sudden move to cancel Qualcomm's chip design license.

While chip architecture licensing disputes might sound arcane, this particular conflict has massive implications for the modern tech ecosystem - from your android smartphone to the future of AI computing. Let's explore what's at stake and why this matters.

Core Dispute Overview

ARM, whose chip designs power virtually every smartphone on the planet, has issued a 60-day notice to cancel Qualcomm's chip design license. This isn't just any licensing dispute - it's a $940 million annual revenue relationship that's now hanging by a thread.

The conflict centers on Qualcomm's 2021 acquisition of Nuvia, a chip design company. ARM claims Qualcomm failed to properly renegotiate licensing terms after the acquisition, while Qualcomm maintains their existing agreement covers Nuvia's operations.

Key Financial Stakes

Let's quantify what's really at stake here:

  1. Direct Revenue Impact

    • ARM derives approximately $940 million annually from Qualcomm

    • This represents roughly 10% of ARM's total revenue

    • Qualcomm is one of ARM's top 5 customers, which collectively account for 54% of revenue

  2. Market Exposure

    • ARM's architecture powers hundreds of millions of processors annually

    • Qualcomm generates approximately $39 billion in annual revenue

    • The company sells hundreds of millions of ARM-based processors each year

  3. Recent Performance Context

    • Qualcomm's Q3 FY2024 results show strong momentum:

      • Total revenues: $9.4 billion (11% YoY growth)

      • QCT (chip business): $8.07 billion (12% growth)

      • QTL (licensing): $1.27 billion (3% growth)

      • GAAP net income: $2.13 billion (18% growth)

Broader Industry Implications

This dispute goes far beyond just these two companies. Here's why:

  1. Android Ecosystem Impact

    • Qualcomm's Snapdragon processors power the majority of Android devices

    • A license cancellation could lead to:

      • Delayed device releases

      • Potential price increases for Android phones

      • Supply chain disruptions for manufacturers

  2. Strategic Shifts

    • Companies are already preparing contingencies:

      • Qualcomm and Google are collaborating on RISC-V, an open-source mobile architecture

      • They've announced plans for a RISC-V Snapdragon Wear platform for smartwatches

      • MediaTek could potentially gain market share as manufacturers seek alternatives

The timing of ARM's move is particularly interesting given the upcoming legal proceedings:

  1. Original lawsuit filed August 31, 2022 in Delaware District Court

  2. Trial set for December 2024

  3. New action filed by Qualcomm on April 18, 2024

Qualcomm has characterized ARM's license cancellation threat as "unfounded threats" and "a desperate ploy" to disrupt the December trial.

Looking Ahead

This dispute highlights several key industry dynamics:

  1. Power Dynamics

    The semiconductor industry is built on complex interdependencies. While ARM needs Qualcomm's revenue, Qualcomm relies heavily on ARM's architecture for its products.

  2. Strategic Alternatives

    Companies are increasingly looking to reduce their dependencies:

    • Investment in RISC-V architecture

    • Development of alternative chip designs

    • Exploration of new partnerships

  3. Market Impact

    The uncertainty could lead to:

    • Accelerated development of alternative architectures

    • Reshaping of industry partnerships

    • Potential opportunities for competitors

Investment Implications

For investors watching this space, several key considerations emerge:

  1. Direct Impact

    • ARM ($ARM): Monitor revenue impact and customer concentration risk

    • Qualcomm ($QCOM): Watch for product development delays and potential market share shifts

  2. Secondary Beneficiaries

    • MediaTek: Could gain market share if Qualcomm faces constraints

    • RISC-V focused companies: May see increased interest and investment

  3. Risk Factors

    • Supply chain disruptions

    • Product development delays

    • Potential price increases in end products

Conclusion

This dispute represents more than just a licensing disagreement. The outcome will likely influence not just ARM and Qualcomm, but the entire tech ecosystem's future architecture choices and partnerships.

The next few months will be important as we approach both the 60-day notice period and the December trial. We'll continue to monitor this situation closely and provide updates as it develops.

Got Feedback? Let me know if you'd like me to modify or expand any section of this newsletter!

Note: Above analysis is for informational purposes only and does not constitute financial or investment advice. If you observe any errors in numbers, figures, or other information presented here, please email me at [email protected].