"Pre-Market Plunge: Arm vs Qualcomm CPU Market Turmoil Deepens"

The rift between Qualcomm and the chip IP (Intellectual Property) company Arm is widening. Today, there are reports that Arm is planning to cancel the license that allows its long-term partner Qualcomm to use Arm's intellectual property to design chips. According to relevant documents, Arm has given Qualcomm a 60-day notice to terminate the architectural license agreement.

"No comment on this matter." Arm stated in an email response to a reporter from Yicai today. Qualcomm, on the other hand, responded to the reporter, saying that Arm's "desperate tactic" seems to be an attempt to disrupt the legal process before the upcoming court hearing in December. The request to terminate the license agreement is unfounded. "This is Arm's usual approach—more baseless threats aimed at forcing long-term partners, disrupting our performance-leading CPU products, and ignoring the extensive rights already covered by our architectural license agreement to increase licensing fees."

The dispute between Qualcomm and Arm originated from Qualcomm's acquisition of Nuvia, another Arm licensee, in 2021, without negotiating a new license with Arm. In 2022, Arm sued Qualcomm for breach of contract and trademark infringement.

However, Qualcomm seems to have been preparing for a reduction in its dependence on Arm and trying to find a more comfortable position between the CPU x86 camp and the ARM camp. Qualcomm is gradually promoting the transition of chips from the ARM public architecture to its own research and development. Facing the x86 camp's hegemon, Intel, Qualcomm has recently been rumored to have acquisition intentions. The market is more concerned about whether the change in the relationship between the giants will alter the trend of the Arm camp eroding the x86 camp in the PC market and whether it will disrupt the recovery momentum of the smartphone and PC markets.

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Affected by the news, on October 23, before the market opened in the US stocks, both Arm (ARM.O) and Qualcomm (QCOM.O) fell by more than 3%.

Escalation of the dispute

In the PC and server CPU (Central Processing Unit) market, the Wintel system (Windows+Intel), with x86 as the core chip architecture, holds a dominant position, while the reduced instruction set ARM occupies an advantageous position in the mobile chip market, forming the AA system (ARM+Android). The two systems are separate until Apple, which uses ARM architecture for self-developed chips, steps into both the mobile phone and PC "boats" with one foot, and the ARM camp begins to attack the x86 camp in the PC market.

Qualcomm is an important member of the ARM camp in the PC market. In 2021, Qualcomm spent $1.4 billion to acquire the chip design company Nuvia, and that year, Qualcomm announced its re-entry into the PC market. In 2023, Qualcomm launched the PC chip Snapdragon X Elite, which uses the Oryon design developed by Nuvia, and it is expected to launch laptops equipped with this chip this year.

The market is looking forward to ARM architecture capturing more market share in the PC market. The semiconductor market research institution TechInsight recently reported that ARM will pose a threat to x86's long-term dominance in the notebook market, and it is expected that by 2025, ARM will account for one-fifth of notebook shipments, and by 2029, this proportion will reach two-fifths, with ARM's revenue share in the notebook market reaching 52%. Arm CEO Rene Hass predicts that ARM may account for 50% of the Windows PC market in the next five years.

However, for Qualcomm, the dispute with Arm casts a shadow over this prospect. Arm is a globally important chip IP licensing company, holding most of the IP for the ARM architecture. The company's main revenue includes licensing fees and patent fees, the latter being a percentage of the sale of ARM architecture chips. But after Qualcomm acquired Nuvia, in 2022, Arm sued Qualcomm. Arm claimed that Qualcomm attempted to transfer Nuvia's licensing rights without Arm's consent, and after Arm suspended Nuvia's licensing rights in March 2022, Qualcomm continued to develop, violating the licensing agreement.The legal dispute between Arm and Qualcomm has been ongoing for two years without resolution, and this recent "breaking of faces" may indicate an escalation of the conflict. As a major Android processor manufacturer, Qualcomm is one of Arm's largest customers, with many of its products using the ARM architecture. The two companies are deeply intertwined, and a complete breakdown in their relationship would not have a small financial impact on both sides.

Competition Complications

Previously, there have been industry estimates that if Arm were to win the lawsuit, it could force Qualcomm and its partners to stop shipping new laptop models. Doug O'Laughlin, founder of chip finance analysis firm Fabricated Knowledge, believes that the more successful laptops using the ARM chip architecture become, the greater the returns Arm will ultimately receive, making the lawsuit a real risk.

According to Qualcomm's financial report for the third quarter of the fiscal year 2024, the company's revenue from its semiconductor division QCT was $8.069 billion, accounting for more than eighty percent of its total revenue, primarily from the smartphone business. Arm's latest financial performance shows a good growth trend, with revenue of $939 million in the quarter ending June 30th of this year, a year-on-year increase of 39%, and a net profit of $223 million, a year-on-year increase of 112%. However, the breakdown of the cooperative relationship between the two companies could affect subsequent financial data.

"Qualcomm designs chips using ARM intellectual property, which are mainly used in most Android smartphones as well as PCs and automotive products, including its newly launched mobile processor Snapdragon 8 Elite and the automotive platform Snapdragon Ride, both of which are equipped with its self-developed Oryon architecture based on the ARM instruction set," Liu Yushi, a senior analyst at semiconductor and display consulting firm CINNO Research, told First Financial Daily today.

Liu Yushi believes that if the license agreement is ultimately terminated, Qualcomm will have to stop selling products that rely on the ARM instruction set and stop using the ARM instruction set to develop new architectures. Although it can still use ARM's design blueprints under separate product agreements, it is expected that this will still have a serious impact on its revenue and operations, and will also change the industry ecosystem.

Facing a strong IP licensing party, Qualcomm is gradually reducing its dependence on Arm. At the Snapdragon Summit on October 21st, 2024, Qualcomm launched the flagship mobile platform Snapdragon 8 Elite, which uses the second-generation custom Qualcomm Oryon CPU, among other features. Christopher Patrick, Senior Vice President and General Manager of Qualcomm's mobile business, said that Oryon has completed the last piece of the puzzle for Qualcomm's entire SoC (System on Chip).

Yan Bo, Deputy Director of Semiconductor Research at Semiconductor Research, told First Financial Daily that Qualcomm's self-developed Oryon architecture still uses the ARM instruction set, and compared to directly using the ARM public version architecture, Qualcomm will have to pay less to Arm for this. Qualcomm may believe that Oryon is more energy-efficient than other architectures, which is beneficial for capturing the CPU market, and also hopes to use this to promote transformation and compete with other chip manufacturers. However, Oryon is currently not capable of supporting the entire company's revenue. Qualcomm still has many chips that use Arm-licensed architectures. If Arm's license is revoked, it could affect Qualcomm's CPUs, baseband chips, RF chips, etc.

"Whether Oryon can continue to be designed is still a question, because this CPU design faces a lawsuit from Arm, and there is a dispute between the two parties over its legality, which has not yet been determined. Whether Qualcomm will completely break with Arm for this design in the CPU field also needs to be followed up," Yan Bo said, noting that there is still a lack of products on the market that can prove the performance of Oryon products. Nuvia, as a startup company, may not have the technical capabilities to support the entire business of Qualcomm.

Yan Bo believes that based on the current news, Arm has given a 60-day period for both parties to negotiate, and it is currently unlikely that the license will be completely revoked. However, if the license is really revoked, it could lead to other companies in the industry taking the opportunity to seize Qualcomm's market and affect Arm's revenue.Facing the strong offensive of high-end Arm camp manufacturers in the PC market, the x86 camp has been actively defending and looking for opportunities in recent times. At the recent Lenovo Tech World conference, Intel and AMD jointly announced the establishment of an x86 ecosystem advisory group. This ecosystem consulting group aims to shape the future of x86, simplify software development, ensure interoperability and interface consistency, and provide developers with standard architectural tools, instruction sets, and a clear vision for the future. "I want to tell you that the rumors about the 'deadline' are greatly exaggerated. We are still alive and doing very well. x86 is thriving," said Intel CEO Pat Gelsinger.

It is still uncertain whether Qualcomm will get closer to the x86 camp in the future or further deepen its layout in the PC and server fields by acquiring Intel. In September this year, the market had news that Qualcomm was interested in acquiring Intel, but there has been no public progress on this matter so far.

In addition, Liu Yushi believes that ARM's cancellation of licensing may force Qualcomm and other chip manufacturers to reconsider their technology paths, such as deploying the RISC-V architecture to enhance their competitive advantages in the market competition.

Qualcomm has previously made moves in RISC-V. Last August, Qualcomm, Bosch, Infineon, Nordic Semiconductor, and other companies announced that they would join forces to establish a new company focused on RISC-V technology. The aim is to promote the global application of the RISC-V architecture by supporting the development of the next generation of hardware. The new company will initially focus on the automotive field, with a long-term goal of expanding into broader mobile and IoT markets.