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Alexandru-Catalin Patrascu

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DR Wolfgang Messner

Group 6

EXECUTIVE SUMMARY 2

INTRODUCTION 3

THE INDUSTRY PERFORMANCE 3

DAVID VS GOLIATH 4

MONEY FOR THE NEW HORIZON 6

THE STRATEGY 7

Figure 1. ARM business model8

WHERE NOW? 9

BIBLIOGRAPHY 10

APPENDIX11

Figure 1. Details relating to mobile application processors to ship or sample

during 2012 11

Figure 2. ARM holdings PLC: Summary of Finance 12

Figure 3. ARM revenue sources 13

Figure 4. Gartner-Hype-Cycle 14


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Executive summary

The economic downturn had an impact on the semiconductor industry but the

latest estimates are showing signs of recovery. While Intel is controlling this industry,

the microprocessor, the semiconductor end market with a $ 313 billion market and

strongest demand is controlled by ARM, a small British firm with a different business

strategy than Intel.

The latest details about the Intels mobile processor have ignited ideas among

users and stakeholders. Is this ARMs end?

No. Comparing Medfield, Intels first SoC with ARMs based application

processors (see appendix, figure 1) fails on every comparison. Intel has a long way

ahead to catch up with ARMs microprocessors. The British company will maintaindominant market share in smart phones and tablets because of a superior tradeoff

between performance and power consumption.

In a David vs Goliath battle, ARM has the resources and innovation to surpass

Intel globally. The ARM strength is not the technology but the ecosystem, which

gives a competitive advantage over its rivals. A federation approach of a business

model with hundreds of producers, designers, tools that leads to an innovative

ecosystem is a success factor for the industry.

Can a company with a manufacturing need really scale a business through an

ecosystem?


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Risks to ARM Holdings include the cyclical nature of the semiconductor

industry, competition from Intel and MIPS, quarter-to-quarter license revenue

volatility, and a heavy reliance on consumer/enterprise spending to grow royalty units.

At the lunch of Medfield mobile processor information on 8th of February 2012

Intel made it clear that is moving into ARMs domain. The announcement affected

ARMs share price on the stock market and people start speculating on the companys

future position in the microprocessor industry.

Section one of this report will look into the semiconductor industry performance

and the future estimates. David vs Goliath section illustrates the ARM s contextual

situation and analyses the competitive stance of the company in report to Intel, the

main competitor while section 3 and 4 explains the strategic and financial resources

and the value chain of ARM. Last section provides a conclusion and a personal

opinion of ARMs strategy.

The industry performance

While the European debt uncertainty seemed to wane heavily on consumerspending during last year, the semiconductor industry giants are hopeful the worst is

behind us and the US economy is not heading into its second recession in four years.

The industrys performance depends upon customer demand. The three pillars of

semiconductor consumption include:

Consumer spending on electronics goods, Enterprise IT hardware spending, Carrier capital spending plans (wireless and wire line).

Each of these pillars is nearly equally weighted. The incremental weakening in

the PC, low and mid-end handset markets and no signs of recovery in consumer

electronics markets such as TV weakened in second half of 2010. The only

semiconductor end markets that are strong are the smartphone, tablet and

automotive/industrial markets, thus the microprocessors.


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Disruption in supply of components due to the Japanese earthquake and

Thailands floods had a major impact in the second and third quarter of 2011 for

semiconductor companies, increasing the uncertainty of the industry.

However, Bloomberg estimates a 5 % grow in the chip industry for the financial

year of 2012 while industry data points indicate chip industry orders have started to

re-accelerate during the past 2 moths. Assuming the global economy is not derailed

during 2012, and assuming buyers of semiconductors replenish chip inventories,

upside may exist to the 2012 chip industry growth forecast. The biggest risk would be

a double dip in the economy and end demand. Share loss in smartphone and tablets

markets could also result in downside these estimates.

But the grim risks seem unlikely for Benchmark Company. The think tank

lowered the semiconductor sector rating from overweight to market weight which

is an indication that revenue forecasts have become conservative enough, the demand

for electronic goods would hold up in light of the economic downturn and that days of

chip inventory held in the supply chain have reached an acceptable level.

Also there are signs of innovation polices in Europe that could support an open

innovation eco-system for particular industries, making information freely availableto companies and act as catalyst for their development. It might be that some

technologies or markets are more beneficial and likely to succeed with this type of

organization than others.

David vs Goliath

The release of the latest electronic tablet by Apple, the Ipad 3 with the A5X

chip had brought yet more attention to ARM holdings. The chip is based on a quad-

core architecture licensed from ARM and it is part of a new wave of processors that

the British company wants to reassure its position in the microprocessor industry. In

stake is a $313 billion market (Economist, 2012) .The battle with its rival Intel goes

on microprocessors, the semiconductor end market with the strongest demand.


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Intel and ARM are different in size and approach. While the British company

had in 2011 revenue of $588 million and pre-tax profit of $172 million the American

had for the first nine months of last year around $40.1 billion in revenue and $13.2

billion in pre-tax profit (Economist, 2012). Yet, ARM still has the global edge within

the mobile phones and tablets market and things are about to change.

On January9, 2012 Intel released various performance and power benchmarks

for its Medfield mobile processor. Intel announced design wins for Medfield with

Lenovo and Motorola Mobility. Since these announcements, ARMs shares have

underperformed the SOX by 1,200bp (Financial Time, 2012).

At the surface, Intels Medfield benchmarks may look comparable to older

generations of ARM-based application processors. However, by the time Medfield is

ready to ship in 2012, comparable generation of ARM Cortex-A9/A15 multi-core

processors will offer superior performance and power usage metrics relative to Intel.

Based on superior performance and power use tradeoffs for ARM-based mobile

application processors many experts in believe Intel has not finally got it right with

Medfield (Benchmark, 2012).

Medfield is Intel's first real SoC (system-on-a-chip) or system processor, whereall components are found inside the same package. The advantage with this over

previous Intel solutions is mainly lower energy consumption, but also smaller imprint,

which is just as important in the hunt for thinner and slimmer smart phones. This is a

way of saying to ARM: We are getting closer.

What Intel failed to do was to compare ARM-based application processors that

will ship to the market at the same time as Medfield. (See appendix, figure 1). Most of

the ARM-based application processors that will soon hit the market are:

Manufactured on a process node equal to or smaller than Medfields 32nm node. Use multiple Cortex A9 to A15 cores in order to deliver improved performance or

lower power consumption to crunch smaller tasks.

Deliver clock speeds (MHz) equal to or greater than Medfield. Deliver lower power consumption versus Medfield.


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However ARM is relatively disconcertedby Intels recently announcement of

Tri-gate transistor technology. Semiconductor industry analyst Dan Hutcheson from

VLSI research in an interview to BBC News said that the new process would secure

Intels market dominance. He also added 3D architecture would not only benefit

Intel's desktop processors, but the chips it manufactures for mobile devices (BBC,

2011). Remains to be seen whether Intel can leverage its almost 4 year lead in 3D

transistors to gain share in tablets/smartphones.

On the other hand, if ARM starts to gain substantial share in new-targeted

markets such as PC/servers would achieve the kind of scale that Intel enjoys. ARMs

presence is increasingly being felt in new end markets such as mobile computing

(tablets and notebooks), servers and microcontrollers (MCUs). In addition, ARM is

gaining momentum in graphics processing and physical IP. No specific targets on PC

and server market share were announced. However, ARM indicated that it expects

respectable shares in these markets by 2020.

Mr. Chu the ARMs director of consumer client computingargues that the

advantage of ARM ecosystem moving into the PC ecosystem is its bringing in new

entrants, new competition, low power consumption, always-on always connected

mindset and the competition associated with it. Youre bringing all of that into a space

thats been highly uncompetitive fora while (Mashable, 2012)

Money for the new horizon

The new target for ARM would be costly. Specific knowledge, fast moving

industry and the cost for R&D would capture a big chunk of the companys revenue.

Arguments that are strong enough to prevent other companies to enter this industry.

AMD and Intel are fierce rivals in a mature PC/servers chip industry but the

ecosystem is a competitive advantage for Britons.

Figure 2 of the appendix provides a 3-year summary and a 2-year J. P. Morgan

forecast ofARMs finance. As seen, the company position is and would be more than

stable to start the pursuit of rival competitors in the targeted industries.


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ARM has five distinct sources of revenue (see appendix figure 3). The main

source was the Process Division (ARM PD) royalties representing 46% of the

companys 2011 financial year. For the period covering 2010-2015, J.P. Morgan

expects ARM PD royalty units to post a 20% compound annual growth rate, and by

2015, ARM PD royalty revenue should represent more than half the companys total

revenue explaining the forecast (Morgan, 2012). Based on royalty units by segments

reported by the company, 45-50% or more of ARMs royalty units are from end

markets that are weak currently (J P Morgan).

The new Windows 8 will be ported to the ARM processor architecture would

help accelerate mobile computing share gains for ARM beginning from the second

half of 2012 when they expect around 150 billion ARM units to be shipped between

2011 and 2020. Also, ARM should gain significant market share in the highly

fragmented MCU market following a wave of licensing momentum for the Cortex M-

class cores (Bloomberg, 2012).

Investors according to Bloomberg are fixated on the ability of the ARM

community (ARM + licensees) to maintain dominant share in the smart phone and

tablet market as well as the ARM communitys ability to penetrate the PC market

with the pending launch of Windows 8 which is ported to ARM for the first time.

Recent developments in the mobile and PC processor market have stimulated a battle

between the Intel camp and the ARM camp which seems to go in favor of the British

company.

The strategy

Many analysts points at the business model and architecture itself as a

competitive advantage for ARM and not its technology. The value chain design and

the architecture make ARM different from other competitors.

The British company is a Fabless chipmaker (Economist, 2012). ARM makes

the design and market them but outsource to a third party to make the manufacturing.

Has high potential grow and they are not burdened by the overhead associated with

manufacture or fabrication (Bloomberg, 2012).


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Depending of the technology and the type of license, the prices for a chip

license vary around several millions. After the third party makes the chip, ARM

receives royalties for each chip sold by the manufacturing semiconductor company.

Usually it takes around 3-4 years and can last 20 years. Figure 1 illustrates the process.

Figure 1. ARM business model

Source: ARM.com (2012)

ARM highlighted its flexible licensing options ranging from architecture license

for companies who wish to design their own ARM compliant processors to single-use

licenses for smaller/new companies targeting a specific high-volume market. ARM

estimates that a top-10 semiconductor company saves 60-70% costs by licensing

processors from ARM vs. developing internally.

This lead to a federation approach of a business model with hundreds of

producers, designers, tools, etc., while Intel looks more like a feudal kingdom

involving very few outside (InnovationManagement, 2012). The big difference

between Intel and ARMs revenue and size of trading is Intels control over design

and manufacturing. They bring the chips faster and almost faultless to the market than

the ARM and have 100% control over the know-how and revenues.


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Where now?

Analyzing Apples triumph and Nokias fall reveals that the business model

located around an innovation ecosystem is a success factor for global information and

communication industry. The current ARM success proves that innovation based on

ecosystem is a potent strategy for companies in semiconductor industry. It also

provides expanding options. Tackling Intels supremacy in PC/servers orgoing to

serves and microcontrollers and graphics and physical IP would be a winning card.

Looking at Gartner-Hype-Cycle (figure 4, appendix) seems right to move into

other sectors. Ahead, ARM has a potential enormous market. If the current ARM

microprocessor market is limited to the number of persons on the planet the other

markets provides an endless source of revenue.

ARM will maintain dominant market share in smart phones and tablets because of a

superior tradeoff between clock speed (performance) and power consumption, a

tradeoff usually measured in DMIPS/watt. However, as demonstrated by recent

announcements, Intel could land a few smart phone and tablet design wins simply due

to the companys marketing muscle.

Andersen a senior adviser to the Nordic Innovation Center argues that

European companies have traditionally failed to achieve the kind of scale that Intel

enjoys (Forbes, 2012). Well, the direction and the speed that ARM goes ahead make

me believe that this company would be an exception. If in the past Intel enjoyed the

Windows alliance, ARMs ecosystem and strategic alliance with Apple the largest

company in the world by market capitalization (Economist, 2012) may have what it

takes to emulate Intel.


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BBC (2011) Intel unveils 22nm 3D Ivy Bridge processor,BBC technology[online] available athttp://www.bbc.co.uk/news/technology-13283882 , (accessed March 15, 2012)

Benchmark (2012) Intels release of Medfield details takes bite out of ARMshare, Semiconductors & related technology [online] available at Bloomberg,(accessed March 15, 2012)

Benchmark (2012) Processor license fees and royalties drive another strongquarter; raising estimates, Semiconductors & related technology [online] available atBloomberg, (accessed March 15, 2012)

Benchmark (2012) Lowering semiconductor sector weighting foroverweight to market weight, Semiconductors & related technology [online]available at Bloomberg, (accessed March 15, 2012)

Economist (2012) Apples share price , Finance and economics [online]available at http://www.economist.com/node/21551065, (accessed March 15, 2012)

Economist (2012) The Difference Engine: Send in the clones, Tablet

computers [online] available athttp://www.economist.com/blogs/babbage/2011/03/tablet_computers_0?sort=2#sort-comments, (accessed March 12, 2012)

Economist (2011) The different engine: Intel left outside, Science and

technology [online] available athttp://www.economist.com/blogs/babbage/2011/05/computer_processors , (accessed

March 10, 2012)

Economist (2011) Difference engine: The iPads third coming, Science and

technology [online] available athttp://www.economist.com/blogs/babbage/2011/12/tablet-computers , (accessedMarch 10, 2012)

Forbes (2012) Intel vs ARM: Battle of the business model [online] available

at http://www.forbes.com/sites/haydnshaughnessy/2012/02/24/intel-vs-arm-battle-of-the-business-model/2/, (accessed March 16, 2012)

Hunt, P (2011), Technology weekly, marketing communication [online]available at Bloomberg, (accessed March 10, 2012)

InnovationManagement (2012) Entrepreneurs of the World, Unite in Eco-systems! [Online] available at

http://www.innovationmanagement.se/2012/02/20/entrepreneurs-of-the-world-unite-in-eco-systems/, (accessed March 23, 2012)

Morgan, J.P (2012) European Semiconductors,European Equity research[online] available at Bloomberg, (accessed March 22, 2012)

Pachal, P. (2012) ARM shrugs off Intels first smartphone [online] available

at http://mashable.com/2012/01/13/arm-responds-to-intel/, (accessed March 22, 2012)
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Appendix

Figure 1

Details relating to mobile application processors to ship or sample during 2012

Source: Benchmark (2012) Lowering semiconductor sector weighting for

overweight to market weight


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Figure 2- ARM holdings PLC: Summary of Finance

Morgan, J.P (2012) European Semiconductor


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Figure 3. ARM revenue sources.

Source: Benchmark (2012) Lowering semiconductor sector weighting for

overweight to market weight


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Figure 4 Gartner-Hype-Cycle

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