Revenue Generation Through Licensing Royalties: The Case of ARM Holdings
Technology Management 2024. 6. 24. 15:57Introduction
In high-tech markets, the share of revenue generated through licensing royalties is steadily increasing. Licensing offers new revenue opportunities, promotes the recovery of R&D investments, and contributes to market share expansion. This model is also adopted in the semiconductor industry, a high-tech sector with significant R&D costs. According to Statista, the semiconductor IP licensing market was valued at $6 billion in 2022 and is projected to grow to $11 billion by 2032.
The Case of ARM Holdings
ARM Holdings, a noteworthy company in this field, generates revenue by licensing semiconductor designs and providing related technologies. Established in 1990 in Cambridge, UK, as a joint venture between Acorn Computers, Apple, and VLSI Technology, ARM stands for Advanced RISC (Reduced Instruction Set Computing) Machines. ARM's first success was the ARM6 processor used in Apple's Newton PDA. ARM's design philosophy—simplicity, efficiency, and scalability—made its processors ideal for mobile devices and embedded systems due to their low power consumption and high performance. As the industry transitioned from the PC era to the smartphone era, ARM's designs were widely adopted across various sectors. ARM strengthens its technology protection through a robust patent portfolio and a revenue model that requires all companies using ARM designs to pay licensing royalties.
ARM's Business Model and Patent Strategy
Unlike integrated semiconductor companies like Samsung or fabless companies like Nvidia, ARM provides IP to fabless companies at the design stage, positioning itself at the forefront of the semiconductor value chain. ARM operates a business model centered on technology IP, licensing intellectual property without manufacturing semiconductor designs. Typical fabless semiconductor companies outsource manufacturing to external foundries, whereas ARM solely provides semiconductor design licenses. This distinction allows ARM to avoid the intense competition in semiconductor manufacturing and secure royalties from products using ARM's IP.
Collaboration within the semiconductor supply chain and ARM's decision not to expand beyond IP provision have turned the semiconductor IP market into a non-competitive space, benefiting the entire industry. ARM's business model and patent strategy have facilitated easy access to its technology, enhancing industry efficiency. The relatively low licensing costs have suppressed unnecessary competition in specific technological areas, promoted industry-wide standards, and reduced initial investment costs. This allows semiconductor companies to focus on their core competencies and accelerate technological innovation.
Mergers and Acquisitions
ARM's technological capabilities have made it a target for multiple mergers and acquisitions. In 2016, SoftBank acquired ARM for approximately $32 billion. In 2020, Nvidia attempted to acquire ARM for $40 billion, aiming to combine Nvidia's and ARM's technologies. However, this deal fell through in 2022 due to antitrust regulations and industry concerns. ARM subsequently went public on the Nasdaq in 2023. The industry pursued the direction of allowing ARM's technology to become a standard in specific areas, thereby reducing unnecessary competition and improving overall industry efficiency. Unlike major semiconductor companies, ARM's 2023 revenue was $3.6 trillion KRW (approximately $3 billion), with an operating profit of $900 billion KRW (approximately $700 million). In contrast, Samsung Electronics reported a 2023 revenue of $258.16 trillion KRW (approximately $196 billion) and an operating profit of $6.54 trillion KRW (approximately $4.89 billion) (Samsung News) (SamMobile).
ARM's strong patent portfolio, continuous license revenue, technological leadership, broad industry applications, and scalable licenses consistently attract interest from semiconductor companies seeking to acquire stakes. However, ARM's strategy of not expanding beyond the value chain to maintain its dominant IP position can pose challenges depending on the acquiring company's focus. The strategic question remains whether downstream companies or other firms will acquire ARM. SoftBank's decision to list ARM on the Nasdaq reflects this complexity.
Conclusion
ARM Holdings occupies a unique position in the semiconductor industry through its licensing royalty revenue model. With a robust patent portfolio and technological leadership, ARM contributes to industry efficiency by providing widely applicable technologies. ARM's future, as a consistent target for mergers and acquisitions, remains a key point of interest.
