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Arm plans to substantially increase the royalties and will charge based on the average price of terminal equipment

Update time : 2023-03-27 17:15:26

On March 23, the British "Financial Times" reported that according to several industry executives and former Arm employees, Arm plans to significantly increase the royalty, and has notified Qualcomm, MediaTek, Unisocand other major customers and some mobile phone brands manufacturer.

It is understood that Arm originally charged royalties based on a certain percentage of the average price of chips, but now Arm plans to change the basis for charging royalties to a certain percentage of the average price of terminal equipment. The main impact is Arm's Cortex- A-series processor IP, which is also the processor IP that global smartphone chips rely on. This also means that the royalties charged by Arm according to the revised charging method may be several times higher than the original ones. Because the average price of smartphones is much higher than the average price of chips. This would be the first time in decades that Arm's business strategy has undergone such a major change.
A former senior Arm employee who left last year said SoftBank was testing the market value of Arm's monopoly. SoftBank, which bought Arm for £24.3 billion in 2016, is now planning an Arm IPO and plans to retain a majority stake after the IPO.
According to the report, SoftBank will start to promote pricing reform as soon as next year, but customers are not willing to accept the new changes. It is rumored that MediaTek, Unisocand Qualcomm, as well as several Chinese smartphone manufacturers including Xiaomi and OPPO, have known about Arm's plans.
TechInsights analyst Sravan Kundojjala pointed out that the current average prices of smartphone chips of Qualcomm, MediaTek, and Unisocare $40, $17, and $6 respectively. A chip can only receive $0.06 to $0.8. In contrast, the average selling price of smartphones in 2022 will be US$335 per unit. If it is also charged at a rate of 1-2%, it means that the royalties charged by Arm will be as high as US$3.35-6.7. The charging method will bring about dozens of times of growth.
However, the source also pointed out that Arm is unlikely to require each mobile phone to pay a royalty of 1 to 2% of the selling price, but the new pricing strategy will inevitably greatly increase Arm's overall profitability.
A senior executive of a leading Chinese smartphone manufacturer said that the royalties charged by Arm in the future should be at least several times higher than the current one.
It is worth noting that Apple Inc., which has reportedly signed a special licensing and royalty agreement with Arm, does not seem to be included in Arm’s discussion of changing its business model.
According to the third quarter report of the 2022 fiscal year released by Arm in February this year, the total revenue for the quarter reached 746 million US dollars, a year-on-year increase of 28%. Adjusted EBITDA was $450 million and adjusted EBITDA margin was over 50%. Among them, licensing revenue reached US$300 million, a year-on-year increase of 65%; royalty revenue reached US$446 million, a year-on-year increase of 12%.
Arm is targeting an IPO in the U.S. market within this year. According to foreign media, Arm aims to raise at least US$8 billion, and hopes to have a valuation of more than US$50 billion.

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