Photograph by Chris Ratcliffe/Bloomberg
ARM's Segars
ARM Holdings (ARMH) may be the tech industry’s biggest secret. It designs chips that go into billions of products, and it has a lock on the mobile-computing business, yet few people have heard of it. It also makes about as little money as is possible to make, given its dominance in such a lucrative field.
The absurdity was on full display early this morning, when the company posted its fourth-quarter results. Simon Segars, the company’s chief executive officer, revealed that the 50 billionth ARM-based product shipped during the quarter and said he expects to ship an additional 50 billion chips over the next few years. Segars also disclosed that for the first time in history, ARM drew more than $1 billion in revenue for the year.
The chip company you have probably heard of is Intel (INTC). It makes the processors that go into most of the world’s PCs and servers. The company pulled off one of the great marketing triumphs of the past 50 years with its “Intel Inside” campaign, which made it basically the only component maker with any sort of name recognition. About 400 million computers with Intel chips inside are expected to be sold this year.
That compares with more than 10 billion ARM-based products projected to sell in 2014. Every iPhone (AAPL) and iPad ever sold contained an ARM chip. Similar things can be said for Android smartphones and tablets and Amazon.com’s (AMZN)Kindle e-readers. Close to 99 percent of all the mobile phones in the world rely on ARM chips, as do millions of other products such as cars, TVs, and medical devices—basically, anything that could use some computing oomph. The coming wave of wearable gadgets, clever thermostats, and the like all run on ARM chips, too.
Start adding up all the data points, and you arrive at a rather telling observation about the modern world. On a typical day, people use ARM-based products more than they use anything else. Around 60 percent of the world’s population—that’s 4.3 billion people—touches an ARM device each day. This sort of reach rivals access to electricity (74 percent of the population) and access to basic sanitation (64 percent).
You can buy a cheeseburger from the Golden Arches in 118 countries; you can buy an ARM-based phone in 196. Chip industry analyst Jim McGregor calculates that 1,250 Coke products are consumed per second worldwide, while people collectively poke their phones 447,000 times per second to take a call, text, or shoot a photo. “The mobile phone has reached the point of personal acceptance only surpassed by basic necessities,” he says. ARM has made much of this reality possible.
Less impressive is the money ARM generates from all these products. Its roughly $1 billion in revenue is an almost incomprehensibly low figure for a company that called the major technology trends of the last five years so correctly. Intel, seen as a laggard tied to the languishing PC market, took in $52.7 billion last year.
The revenue gap represents a massive difference in philosophy and business strategy between the companies. Intel designs and manufactures its own chips. ARM, meanwhile, has engineers create chip designs that companies such as Apple, Samsung (005930:KS), and Qualcomm (QCOM) license, customize, and then pay manufacturing contractors to build. So ARM earns pennies on each smartphone sold by its customers via royalties, while Intel makes tens to hundreds of dollars on every chip it sells.
This year a handful of companies, including Samsung and Nvidia (NVDA), should begin selling ARM server chips—low-power, low-cost products aimed at Web companies such as Google (GOOG) and Facebook (FB) that buy servers by the tens of thousands. Google has also teamed with Samsung, Hewlett-Packard (HPQ), and others to produce ultra-cheap Chromebook laptops that run on ARM chips.
ARM’s new push won’t be easy. It is unproven in the server business, it will have to compete against Intel’s own low-cost chip, and companies such as Qualcomm andMicrosoft (MSFT), for example, have previously tried to sell low-cost, ARM-based computers and failed miserably. Segars, a balding, mild-mannered engineer, says he’s up for the challenge so long as ARM can do battle in the low-key fashion that has served it so well. “We do take existential threats quite seriously,” says Segars. “But I hope we can compete and still be nice guys.”
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