The Arm Wrestle
What many of us believed was inevitable has finally come to pass. Nvidia’s bid to buy Arm has failed. This entire saga has been fascinating to follow. I have heard, or read, all the major arguments for and against this deal and there has been some truth to both sides of the arguments. But, ultimately, it has been made clear Arm must remain a completely neutral entity but by doing so, it may very well struggle to grow the business to its full potential.
The Strength in Nvidia’s Argument
There were two points Nvidia and Arm both made on why the deal should go through that I completely agree with. The first was that there needed to be more competition to x86 in the data center. CPUs running on x86 from Intel and AMD dominate the data center/server market with ~98% share. We can all agree competition is good, and choice should exist in the market which means having more options for core CPU compute beyond x86 is a healthy environment.
The second point Nvidia and Arm made that I agree with is that Arm requires more resources than it has access to currently in order to create an IP roadmap to compete with x86 in the data center. Nvidia believed their financial backing and willingness to invest in IP and Arm’s roadmap and ecosystem would go a long way to help make Arm more of a viable competitor in the data center/server market.
As we speculate about Arm’s future, it is important to add some context here as to why the strongest arguments made by Nvidia and Arm are related to the data center/server market.
Silicon’s Gold Mine
When you take a step back and look at all the markets for silicon content in terms of dollar amount, the data center/server market distinctly stands out. There is no market as profitable for silicon suppliers as the data center and it is not even close. Products like smartphones and PCs contain hundreds of dollars of semiconductor content. The data center/server market as of 2020 averaged ~$3000 dollars of semiconductor content per unit in 2020 and is forecast to ~$6,000 of semi content per unit by 2025. By dollar value, the data center/server market is the gold mine for semiconductor companies.
Nvidia knows this since their GPUs have the lion’s share of the data center. Nvidia also has plans to build a data center/server CPU, which they can and will continue to develop even though they won’t own Arm. But this takes us back to the main Nvidia argument that Arm needs a cash infusion into the technology roadmap and the ecosystem in order to create a CPU competitor in the data center. Nvidia would know as well as any, how Arm’s IP would stack up against x86 given they are making a competing CPU part. Nvidia wants more of the datacenter dollars and they know a CPU part, or even an Arm-based accelerator, can help them greatly grow their dollar TAM of the datacenter. But I sense Nvidia themselves believed that Arm IP as it is will face significant hurdles displacing x86 in the data center.
What Happens to Arm Now?
All signs point to Arm making a run at an IPO. With current Arm CEO Simon Segars turning the reins over to Rene Haas, I believe this is the first signal and step toward an IPO. Rene has a proven track record with his role both at Nvidia and Arm and investors will respond well to Rene’s leadership. However, if we believe Nvidia’s argument that a cash infusion is necessary for Arm, I have my doubts they will get this from the public market.
There are a wide range of challenges to Arm’s economics as a whole. While billions of chips are shipped each year Arm’s annual revenue is around two billion a year. Licensing businesses have always been looked down upon by public market investors. They realize the value is more fully realized by the company licensing the IP than the company the IP is licensed from. Arm is up against an economically challenging business model, in its current state.
Arm will need to sell a strong enough story to the street to get them to believe enough in their data center/server story to price into their valuation share gains in that market. Even then, I’m not sure they would get the war chest Nvidia was going to offer. In my opinion, if Arm wants to be competitive in the data center, they can’t just rely on the public market. Perhaps Nvidia will still be willing to give some of their IP back to the Arm community as they offered if their acquisition deal went through. Perhaps other Arm partners like Qualcomm, Broadcom, Marvel, etc., would be willing to collaborate, or even invest, more deeply in order to help Arm with their IP portfolio and roadmap. What has always made Arm interesting to me is they can acquire an army to go compete with an incumbent. But in this case, Arm will need their army to also support their efforts in a much closer collaboration than ever before if they hope to truly compete with x86 in the data center.
Intel’s Strategic Alliance with Risc-V
Intel today yesterday they have built an accelerator fund for Risc-V companies to create a new generation of chips based on Risc-V but made on Intel process technology. This was a fascinating move on its own but now made even more interesting with the Nvidia-Arm deal no longer happening.
Risc-V is not yet, and may never be a threat to x86 CPUs in the datacenter. Interestingly, it may actually be a complementary architecture rather than a competing one. But either way, Intel Foundry Services is looking to capitalize on the growing accelerator and hyperscaler companies creating data center/server chips by having them made at Intel Foundries. Intel has the capacity, and the money to invest in the Risc-V ecosystem and that is exactly what they are doing. If Risc-V does become a companion process to x86 it will make it that much more difficult for Arm in the datacenter. I don’t know if Intel is thinking that far ahead strategically, but this certainly feels like that kind of a chess move.