- Lisa FleisherThe Wall Street JournalCANCEL
Feb. 25, 2015 4:56 p.m. ET
LONDON—After riding the smartphone wave, chip designer
PLC is laying the groundwork for its second act.
Little known outside the technology industry, Cambridge, England-based ARM reaps lucrative licensing fees and royalties from the likes of Apple Inc. and
It came up with the basic engineering found in more than 95% of the world’s smartphones, turning the company into a stock-market darling and a rare European tech giant. Since 2010, its market value has ballooned more than six times over, and now hovers near $24.6 billion.
But as the smartphone market matures around the world—threatening slower sales—ARM is embarking on one of its most aggressive forays into new markets in its 24-year history. It is trying to jump-start the market for so-called connected devices, which includes products as diverse as fitness bands and thermostats, and grab a chunk of the lucrative server segment from
A little over a year ago, ARM launched a division devoted to the “Internet of Things.” It has tried to spur demand for these new chips by developing specialized software for connected objects and working with universities to encourage engineers to learn to create products that use its chips.
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Mobile phones and tablet computers remain central to the company’s strategy. Sales of smartphones globally are still on the increase, even if growth is slowing. Consultancy Gartner estimates global smartphone sales rose 24% in 2014, down from 42% in 2013 and 59% in 2011.
The prominence of smartphones for ARM will be on display next week at Barcelona’s Mobile World Congress, an annual mobile-industry trade fair. Samsung and other device makers are expected to announce a number of phones powered by ARM-based chips. Chips destined for mobile devices—such as phones and tablets—made up 45% of the total ARM-based chips shipped in 2014.
The new shift carries risks, and ARM has had mixed results in early attempts to diversify. It has largely succeeded in extending its dominance in phones to the tablet market, which uses similar chip technology. ARM-designed chips power about 75% of those devices. That is despite a push by Intel into that market. But ARM also has tried to move aggressively—and so far, with minimal success—into servers, which use sophisticated chips that handle complex computing tasks.
The payoff in the connected-devices market might not be as big as with smartphones. Connected devices typically run off chips that often perform simple tasks, such as measuring temperature every few hours or powering the motor for a switch. The potential revenue from licensing fees and royalty payments could be much lower for designs for those types of chips, compared with the complex chips in phones and tablets, skeptics say.
“It’s going to be a very small opportunity for these guys,” says
a Bernstein Research analyst.
Royalty revenue for low-end chips can be a fraction of a cent, compared with a few dollars each for a server chip, ARM says. ARM’s average royalty per chip, a key industry metric, has been falling, hitting 4.5 cents in the past fiscal year, compared with 6.7 cents in 2006.
But the potential for fast growth in volume could make up for that. Gartner forecasts the number of connected devices will rise to 25 billion in 2020, from three billion in 2013.
“We’re just seeing tremendous growth,” said
head of marketing for ARM’s Internet of Things division. “We’re already at a 25% market share of that industry, and there’s a lot of space for us to grow. It’s already growing very fast.”
Competitors are formidable. Intel has its own Internet of Things group. The unit posted $2.1 billion in revenue last year, according to the company’s full-year 2014 financial results, but that was primarily made up of long-established applications of its chips in hardware such as industrial and office equipment. The company has announced plans for ultrasmall processors for newer uses, including smartwatches and other wearable technology.
Intel acknowledges that ARM has a good head start and a lot of momentum. Intel is trying to rely on its traditional strength in strong computing power to persuade customers to use its chips, Intel spokesman
said. “What we’re really focused on is how do we make it smarter,” he said. “That takes a lot of horsepower, brainpower, energy power to bring that together.”
In the late 1990s, ARM gained an early lead in phones when
decided to use ARM-based chips, followed by Apple’s decision to use ARM designs in the iPhone in 2007. Other handset manufacturers and app developers then gravitated toward ARM, designing programs and hardware that would work across platforms.
So far, there isn’t the same type of standardized technology dominating the market for connected-devices. ARM has taken several steps over the past year to position chips based on its designs as the dominant choice for engineers and product designers looking to add some computing juice to objects.
Last year, for instance, it rolled out a free operating system for embedded devices aimed at making it easier for companies to develop products quickly. Earlier this week, the company, in partnership with
International Business Machines
showed off a kit simple enough for electronics hobbyists to use to quickly hook up devices to the Internet and control them online. ARM is also funding programs at universities such as the University College London for developers to learn to code for ARM products.
—Don Clark in San Francisco contributed to this article.
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