Arm vs. Qualcomm – Trouble in paradise

RISC-V is the only beneficiary of civil war.

• Arm has launched a strange-looking lawsuit against Qualcomm that looks like an attempt to earn higher royalties from one of its biggest customers or a move by Apple to delay and hinder the development of a competing product for its M series of processors.
• Arm has filed a complaint against Qualcomm that it says is to “protect Arm, our partners and the unparalleled ecosystem we have built” but to me looks like a straightforward contract dispute.
• Arm’s issue is with Qualcomm’s subsidiary Nuvia whose license to use Arm IP expired in March 2022 and not been renewed.
• However, Nuvia continues to develop Arm-based processors in what looks like a breach of contract.
• Nuvia is now part of Qualcomm which clearly believes that the license that it already has to develop Arm-based processors also covers Nuvia.
• At a high level, this complaint makes no sense because Arm gets paid royalties when chips ship and when Nuvia designs ship in silicon, they will be Qualcomm chips and Qualcomm will pay the royalty under the licenses it already has.
• However, Nuvia is a relatively new Arm customer whereas Qualcomm is one of its oldest and largest licensees and so it is possible that the terms that Qualcomm has are much better than those that Nuvia was able to negotiate.
• Hence, the royalties that Arm will earn may well be less under a Qualcomm license than they would have been under a Nuvia license which could be why Arm is taking action.
• Another possibility, albeit remote, is that Arm is being egged on by Apple.
• Apple arguably has the best processors available in the market today with its M-series and will be keen to ensure that competing products are slow to come to market.
• Furthermore, the fact that 22 of Apple’s rivals were willing to voice support for Qualcomm’s acquisition of Nuvia is an indication of just how important it could be long term (see here)
• Apple has already tried to slow the progress of Nuvia by filing a lawsuit against one of its founders (see here) and I am pretty sure that it will be quite happy to see Arm have a crack at the whip.
• This lawsuit marks an unusual note of discord within the Arm ecosystem and the only real winner here is RISC-V.
• The attempted acquisition of Arm by Nvidia lit a fire underneath the tail of a moribund RISC-V which is now attracting investment and gobbling up share at the low end of the market.
• RISC-V remains a very small competitor to Arm that has yet to have any significant impact on its revenues, but the threat is growing and annoying Qualcomm in this way is likely to push it to allocate more resources to RISC-V.
• This is the last thing that a company about to float on the public markets needs to have dominating the discussion around its outlook.
• It would seem that a relatively simple solution to this would be for Qualcomm to dissolve the Nuvia legal entity and fully absorb it into Qualcomm as this would greatly weaken the argument that Qualcomm’s Arm license does not apply to Nuvia designs.
• At the end of the day, I don’t think that this is going to delay Nuvia in any way and I suspect that an agreement of some description will be reached long before there is any trial.
• Consequently, the only real beneficiary here is RISC-V as I don’t think this disagreement will materially alter the outlook for either Arm or Qualcomm.
• Qualcomm, MediaTek and TSMC remain my preferred plays in semiconductors given their relatively low valuations but good growth trajectories.