At ARM, a Leg Up for the Dream of a Company That’s All Brain

The chipless chip company deals with IP, and leaves making semiconducters to others.

Photograph by Hans Neleman

Techno-utopians have long heralded a future industry that deals purely with intellectual property. We’re now a little bit closer.

Bloomberg’s Ian King yesterday wrote about the increasingly fierce challenges that ARM Holdings Plc, the Cambridge, England-based designer of computer chips that dominates the mobile market, poses to Intel Corp. It’s a timely take on the rise of ARM–an important story that’s been two decades in the making.

ARM marks the first really big success for a “chipless chip company,” an idea that sounds terrific in theory but has usually turned out to be difficult to execute. The unlikely sounding “chipless chip” model builds on the older “fabless chip” concept, in which companies would design semiconductors and then contract out the manufacturing to specialists. The ARM model goes one better: instead of contracting out manufacturing, ARM designs the core logic of the chip, and licenses the design for others to build and customize.

ARM Market Cap vs. Apple, Intel, Goldman

The company that was first prominently associated with this idea was Rambus Inc., a memory chip designer. Unfortunately, most of Rambus’s great hopes were punctured by the spears of endless litigation. ARM, too, sputtered for many years before gaining steam. Now virtually all the chips that power high-end tablets and smartphones are based on ARM designs. The iPhone and iPad use ARM cores. So does the Samsung Galaxy range. Nokia’s Lumia Windows 8 phones? ARM, too.

ARM has skyrocketed to a market capitalization of $20 billion. That’s still a fraction of some of the biggest tech companies; the difference is that ARM has a lot fewer employees–just 2,392 at the end of 2012. On a per-employee basis, ARM’s stock market value blows away many better know companies. Look at the chart here. ARM’s market capitalization is now almost $8.4 million per employee. Apple’s, by comparison, is less than $6 million. For Intel–which has 105,000 employees–the number is about $1 million.

All of this raises two questions. First, is ARM now a story of great success–or still one of great expectations? Though it’s solidly profitable, ARM’s profits aren’t nearly as outsized as its market capitalization. Last year the company earned about $67,000 per employee, still less than Intel’s $104,000 and less than one-eighth Apple’s $573,000.

ARM Income per Employee vs Apple, Intel, Goldman

Second question: is this a realistic model for the future of the technology industry? That’s really the big kahuna here. ARM represents a vision of innovation that is close the hearts of folks who see a future dominated by “knowledge workers,” creators of intellectual property in places like Silicon Valley and Cambridge, England implemented by less advanced companies around the world. This is a utopia for the folks lucky to work at a company like ARM, and potentially a nightmare for a lot more: Remember, ARM has just 2,400 employees.

We’re not as close to this as some techno-utopians (or dystopians: it’s hard to decide here) may imagine. There’s another piece to the ARM story: every company that licenses ARM’s intellectual property is a technological innovator in its own right. Consider Silicon Valley-based NVIDIA Corp., whose Tegra 3 processors put together ARM’s basic design with high speed graphics circuitry that is NVIDIA’s expertise.

You can make a similar case using many of ARM’s other licensees. Building a new mobile phone? NVIDIA Inc. and Qualcomm Corp. will each be happy to give you a rundown on why their flavors of ARM chips are the best. Measured by profit per employee, for now both of those companies are ahead of ARM. That may not remain the case forever. ARM’s gotten to the point where it has proven that a relatively small company purely focused on creating intellectual property can have a become a serious contender in key technologies and get a meaningful slice of the profits. Fortunately, that slice comes from a big pie.


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