Phone prices could rise following a new Arm licensing deal
British chip designer Arm is planning to raise the price of its chip designs, potentially leading to a hike in the price of Android phones and other devices.
According to a report in the Financial Times, Arm is attempting to implement a new pricing model for its chip designs, ahead of an initial public offering.
Under the current model, chipmakers such as Qualcomm and Mediatek pay Arm a license fee and a small royalty based on the selling price of each chip those companies distribute to phone manufacturers.
The new model will see device manufacturers pay Arm a royalty based on the average selling price of the device. The chip manufacturers will only be licensed to sell chips to device manufacturers who agree to the new model.
The new model is likely to substantially increase the amount of revenue that Arm earns from each chip. Figures published in the Financial Times suggest that the average Qualcomm chip sells for $40, of which Arm receives a royalty of between 1% and 2%.
The average smartphone, on the other hand, sells for $335. Although Arm is unlikely to receive the same level of royalty for the overall device, even a 0.1% royalty fee would provide around four times the revenue it currently receives from Qualcomm. Qualcomm’s chips are found inside most of the premium Android smartphones.
The new licensing deal would be unlikely to affect Apple, because it designs its own processors based on Arm chip designs, and so will already have a different licensing deal in place.
However, any increased cost for Android device makers will likely be passed on to consumers, given the notoriously tight profit margins on smartphones, especially those at the budget end of the market.
One leading Chinese smartphone manufacturer told The Financial Times that the new royalty figure “will be at least several times higher than what Arm gets now”, and that the company is hoping to implement the new licensing system from 2024.
Arm’s new licensing model is being lined up ahead of an anticipated IPO on the New York stock exchange later this year.
Arm is currently owned by the Japanese conglomerate, SoftBank, who bought the UK-based company in 2016. It’s reported that SoftBank is trying to drive up Arm’s profit margins to increase the company’s attractiveness to potential investors.
Although ARM chip designs can be found in billions of devices worldwide, including almost the entire smartphone and tablet market, wearables, computers and many other devices, the company has always been relatively modestly valued. Its sale to SoftBank in 2016 valued the company at around $30 billion. For comparison, chipmaker Intel is currently worth around $116 billion.
That modest valuation reflects the company’s limited profitability, with earnings of around $1bn in 2021. Hence SoftBank’s desire to push up profits ahead of the IPO, after which it intends to remain the company’s majority shareholder.
Nvidia announced plans to buy Arm from SoftBank in 2022, but that was dropped within months after objections from regulators around the world.