As expected, Apple’s chip design partner Arm is moving toward an IPO. It is interesting the extent to which the risks Arm describes in its IPO prospectus echo those currently faced by Apple and most leading tech companies. That’s why everyone in tech will pay attention to this offering.
Too big to grow?
As with all the world’s biggest tech firms, Arm’s IPO prospectus describes a company that is a victim of its own success. Think about it…
With about 99% of the world’s smartphones using its reference designs to a greater or lesser extent, the company can’t maintain growth in the mobile market alone. That’s not dissimilar to the challenge most others face, though Apple is currently scooping up mobile industry market share as the overall size of that industry declines.
International (bad) relations
Arm’s IPO also reflects on its exposure to China. The world isn’t getting along like it used to do, which means increasing tensions between global superpowers is generating tricky challenges for firms built on notions of globalism, internationalism, and relatively free trade.
We’ve seen the impact of these worsening relations during the Covid crisis, when supply chains struggled and major product launches were delayed. Apple suffered a lot as workers went on strike in China protesting Covid prevention lockdowns. But while that plague may be playing second fiddle on the news agenda today, it hasn’t gone away. These challenges, related supply chain challenges, the war in Ukraine, and increasingly poor economic conditions are all problems for Arm and challenges for everyone else in global tech.
Getting into new markets
With Vision Pro, Apple recently signalled its intentions to develop its business into new markets. That’s not a particularly new approach — Apple Watch, AirPods, HomePods, and the company’s many services all show a company focused on investing today’s record iPhone revenues into equally big businesses tomorrow.
Speculating to accumulate is how companies maintain themselves in difficult business environments, so it’s no surprise Apple is doing this now. But some sectors remain relatively closed to Cupertino, particularly the burgeoning generative AI space.
Arm has similar problems, and its IPO prospectus describes these well, telling us that (perhaps like Apple?) it wants to build its business in AI and in automotive chips. (It is worth pointing out that Arm’s reference designs are used in chips such as Apple’s that offer their own built-in cores to handle machine intelligence functions, such as photography or image recognition.)
Expanding into new markets, worsening international relations, market decline, and the challenges of growth once you reach a certain size are common refrains across every business and industry at this point in time.
So, what happens next?
In the short term, Arm’s current owner, Softbank, will put Arm on the IPO block later this year. When it does, it will hope to recover some of its investment of tens of billions of dollars in the firm, and it is likely Apple, Samsung, Nvidia and all the other big companies already making use of Arm’s processor designs will purchase shares to help protect their interests. The failed attempt to sell Arm to Nvidia shows that regulators will not be happy if any one firm takes a majority stake.
Even Apple, which helped launch Arm years ago to create chips for the ill-fated Apple Newton, will not be permitted to take too much control. There were rumors it was offered the chance to purchase Arm itself in 2020 but declined — despite chips based on the designs Arm creates being used in every Mac, iPhone, and iPad. Arm’s designs are what Apple’s own silicon design teams use as a base for their own chips.
Making more from less
Whoever does invest in Arm shares, Arm management will likely come under pressure to generate more revenue on the sales they already make.
For example, a Financial Times report suggests the deal between Apple and Arm for iPhone chips seems better for Cupertino than for its smaller partner. Arm sees perhaps just 11 cents per chip from devices shipped in the last year. Will there be an uplift in costs, and how will that affect Arm partner revenues — and the cost of the devices we use?
Which brings us to the fifth big challenge Arm and other businesses seem to be facing at this time — how to deliver more revenue per user, and how to upsell existing customers to more expensive products without additional damage to existing market share. (The iPhone Pro Max challenge, in other words.)
What happens with the Arm IPO will be keenly monitored as an allegorical bellwether for what will happen next across the tech industry. With those shares fly or flounder, and what will that mean for the future of tech?
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