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ARM Holdings Plc: Ecosystem Advantage

This case was written by Professors Peter Williamson and Arnoud De Meyer, with research
assistance from Arun Muthirulan. It is intended to be used as a basis for class discussion
rather than to illustrate either effective or ineffective handling of an administrative situation.

Copyright © 2009 Judge Business School, University of Cambridge.

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Warren East, chief executive of Advanced RISC Machines (ARM) opened the
Financial Times on the 9th April 2008 to be greeted by a stark headline: “Intel chief,
Paul Otellini, intends to challenge ARM’s dominance by focusing on internet-enabled
phones.”1 Intel had been an ARM licensee since 1999. But Intel’s renewed interest in
competing beyond chips for traditional personal computers (PCs) had been sparked by
expectations of convergence between computing and mobile telephony. “As laptops
get smaller and phones get smarter it is difficult to say what is a laptop and what is a
handset” Otellini remarked. With over 95% of handsets globally using chips based on
ARM’s designs, the UK company’s market position was an obvious target.

Just over one month later, in his own interview with the Financial Times,
Warren East sounded a defiant note, pointing out that ARM’s designs were becoming
increasingly attractive in an environment with growing demand for mobile devices
that consume less power. His conclusion: “Intel will probably always be able to make
a microprocessor that runs faster, but ARM can do one that uses less power. We are
still a long way ahead on that.”2

Despite building its market capitalisation to around £1.5 billion ($2.5 billion)
since it was founded in 1990, ARM was still small with 1,750 employees compared
with a giant such as Intel (with 86,000 staff and a market capitalisation approaching
$110 billion). But ARM’s quiet confidence wasn’t simply based on its internal skills
and resources. The company believed that core to its competitive advantage was its
distinctive business model whereby ARM promoted, and drew strength from an
extensive business “ecosystem” involving partnerships with over 400 other companies
as well as a broader community of developers and other participants numbering tens
of thousands. Hailed by some as the future of the corporation, this networked
ecosystem model was about to face a new test: competition from a huge and well-
resourced player using an alternative, vertically-integrated business model, in the
shape of Intel.

Humble Beginnings
ARM began as an in-house project to design Reduced Instruction Set
Computing (RISC) chips within the UK computer company, Acorn Computers, in the
mid-1980s. As the name suggests, RISC is a method of developing computer
processors that use fewer instructions to do the same computing operations. Acorn
primarily sold low-priced computers to schools – an application requiring chip
designs that delivered good performance at low cost, small size, and low power usage.
As a result, the ARM project team developed experience in designing against these
criteria.
Although Acorn had become a dominant PC brand in the UK with sales of
50,000 PCs in 1990, the market was still in its infancy. As demand continued to grow
rapidly and competing products using the (then new) Microsoft system software
emerged, Acorn’s resources were being stretched as it attempted to maintain its
market share. Seeking to conserve its capital and leverage external skills and
knowledge, Acorn started working with VLSI Technology, a semiconductor company
based in Silicon Valley. VLSI Technology offered an Electronic Design Automation
(EDA) kit that engineers could use to develop the chips efficiently. This alliance gave
Acorn and the ARM project team access to advanced design technologies that it could
1
Maija Palmer, FT Interview, Financial Times, 9th April 2008, p27.
2
Maija Palmer, “ARM defiant over Intel”, Financial Times, 26th May 2008, p18.

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not afford to develop in-house. Using proven EDA tools and foundry technology also
reduced risk.
Through VLSI Technology, Acorn was introduced to Apple who, at that time,
was working on a project for a new handheld computer, the Newton. The ARM
team’s low-power, low cost chip designs seemed a natural fit with the requirements of
the Newton. But Apple was concerned at the prospect of using a competitor’s design
in one of its strategic projects. To address Apple’s concern and further conserve its
now dwindling cash reserves, Acorn agreed to spin off the ARM project as a separate
company, ARM Limited, jointly-owned by Apple, VLSI Technology and Acorn.
VLSI Technology also took out a license from the new company, to use the ARM
processor technology in its products.
When it was formed in 1990, ARM therefore had a solid technology platform
reflecting seven years development under Acorn’s wing and two leading-edge
customer/shareholders in the form of Apple and VLSI. The question was: how best to
grow the business by leveraging its technology and design knowhow more broadly
within the value chain for electronic devices?

Pinpointing a Profitable Role in the Industry Value Chain

In the early days of integrated circuits (chips), the industry value chain was
vertically integrated. Texas Instruments (TI), for example, not only designed and
manufactured chips, it also made complete products such as computers for seismic
and military applications, inkjet printers, and programmable industrial controls. But
by the 1990s rapid technological progress, especially in miniaturisation, the race to
reduce costs by moving along the scale and experience-curves, and increased product
complexity, led most players to specialise in specific activities within the chain. As a
result, separate companies began to emerge that focused solely on one or two stages
of the value chain such as: design of chips, or development of EDA tools, or creation
of intellectual property (IP), or semiconductor manufacturing (also known as
fabrication or foundries), or equipment supply (see Exhibit 1). TI, for example, began
to specialise in IP for digital signal processing and semiconductor manufacturing.
As it looked to carve out a role for itself within this value chain, ARM was
acutely aware of the very modest resources at its disposal. None of its parent
companies were in great financial shape. Apple had invested $1.5 million, Acorn
contributed an equal value in existing IP, and VLSI invested just $250,000. This
initial investment was enough for 12 engineers to set up operations in a 14th Century
barn in Cambridge and to recruit a CEO.
The person they hired was (now Sir) Robin Saxby – a man with big company
experience including Philips NV, the Rank Organisation, and 12 years at Motorola in
the US and the Far East. He also came with big aspirations. One of the founders,
Jamie Urquhart, recalled that at an early meeting of the new management team Saxby
tabled a brutal question: “Should we strike out for something, or just be in the hand-
to-mouth chip design consulting business?” With Saxby’s enthusiasm and the
founding engineers’ belief in their technology, the team decided to aim to “become
the global standard for RISC chips with a target of embedding ARM designs into 100
million chips by the year 2000.”
This was certainly a stretching target. ARM obviously couldn’t achieve it
using a vertically-integrated business model (which, because it involved covering
almost the entire chain of activities in-house, would require many hundreds of
millions of dollars investment in a semi-conductor fabrication plant just to start). But

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with increasing specialisation in the industry, alternative business models were
emerging. One such model was the so called “fab-less chip company”. This approach
had been pioneered by companies such Qualcomm, Broadcom and CSR who designed
and sold chips to makers of devices such as mobile phones (so-called “Original
Equipment Manufacturers” or OEMs). However, they outsourced the chip fabrication
to specialist semiconductor manufacturers (hence “fab-less”, since the company
designing the chip did not have fabrication plants of its own). Without the need for a
costly fabrication plant, even small companies could enter the chip business by
working in partnership with the semiconductor foundries. This had proved to be a
successful model with many new companies emerging in the space.
Despite this model’s attractions, ARM was concerned that if it adopted the
“fab-less model” it would be exposed to potential competition from the large
semiconductor manufacturers like TI, Intel, or Motorola who certainly would not
become pure, sub-contract fabricators. Building chips would be both very expensive
and risky for a company who core competence was in the design of the processor –
one element of a large and sophisticated “system on a chip” (SOC) design. So ARM
decided to avoid a head-on collision with these industry behemoths by taking the fab-
less model one step further. It decided to become a “chip-less, fab-less chip company”.
ARM’s idea was that it wouldn’t sell chips to the OEMs at all. Instead, ARM
would focus purely on licensing its IP. In return for an up-front licence fee and then a
royalty on each chip, ARM would make its designs and architectures available for the
semiconductor companies to use as a core around which they could develop new SOC
designs and produce chips. The semiconductor companies could then sell these chips
to OEM’s such as Nokia or Samsung. This also had the advantage of turning fab-less
chip companies into potential customers. Ultimately Qualcomm, for example, would
come to use ARM designs in virtually all of their chips.
Of course ARM was realistic enough to know that the major semiconductor
companies were unlikely to rely on designs from a small, external supplier for the
main microprocessor chips in their product range. Proprietary designs for these smart
chips were the way the semiconductor companies sought to differentiate their
offerings by enabling the OEMs to build devices with exciting functionality. But most
devices, such as a mobile phone, contain a group of chips that work together to
perform a particular function (such as handling audio signals) – the so-called “chip-
set”. RISC processors are one of these specialised elements within SOCs that are then
combined to form the chip-set.
If ARM focused on supplying designs for the RISC processors – the
workhorses that run most of the software – then ARM’s competence in designing
chips with low power consumption, low cost, yet with the flexibility to cope with new
applications, and that could be efficiently manufactured in volume, might give it a
winning proposition. ARM would build upon its existing technology base by coming
out with efficient, new RISC-processor designs that would allow the semiconductor
companies to improve functionality and add new features to their mobile devices
while minimising power drain and keeping costs down. By licensing these designs to
semiconductor manufacturers, who would then incorporate these designs into their
own SOCs, ARM would enable improvements in the end product. In this way ARM
could align themselves with the different interests of both OEMs and the
semiconductor giants.

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Validating the Business Model

Apple had accepted these ideas when it decided to incorporate ARM’s designs
in the chip that powered the Newton. But ARM needed to validate its strategy in the
open market. Confirmation that ARM was on the right track came in 1993 when
Texas Instruments (TI) signed up as an ARM licensee. TI at the time was trying to
win the mobile phone business of Nokia, then a relatively unknown Finnish company.
From TI’s perspective, the critical differentiator to win the business of Nokia
would be its proprietary digital signal processing technology. But it needed to
combine this with an underlying RISC processor that worked reliably, consumed
minimum power and came with adequate design support tools, models and software.
ARM’s technology fitted these requirements. So rather than try to develop the RISC
processor in-house, TI included the ARM design into the overall package it offered to
Nokia.
ARM’s early insights about the likely evolution of the value chain proved
prescient. Today the value chain for electronic devices has mostly evolved into a
network of highly inter-related specialist players. Being closest to the customers and
their changing expectations, OEMs focus on designing, assembling and marketing
devices such as mobile phones or digital TVs. They have a major influence on the
evolution of new products and the adoption of new technologies within the industry
and they create the demand for new product architectures. OEMs, in turn, rely on
semiconductor companies/foundries, design companies, testing service providers and
software companies, among others, to contribute their specialist expertise to turn the
new device concept into reality. Any new product is, therefore, the result of multiple
companies working in a co-ordinated manner to bring their respective core
competencies to bear on the opportunity.
The NOKIA N95 mobile phone (or “multimedia computer” as the company
prefers to term it) is a good example. It is driven by a series of specialist chips
supplied by companies like TI and ST Microelectronics. Each of these chips
incorporated ARM’s designs. ARM’s tools also underpin the key software: the
operating system from Symbian and the video software from companies such as ACT
Imagine (See Exhibit 2).

From Supplier to Partner

In a traditional value chain, ARM might have been consigned to the role of
just another specialist supplier without any real influence beyond its narrow role.
Instead, however, ARM’s relationships evolved towards a set of close partnerships
and eventually to ARM becoming a pivotal player in the ecosystem for electronic
devices. This shift resulted, in part, from the reality of ARM’s early experience of
what it would take to be successful in embedding its designs in an end-user device
alongside components supplied by others. Nokia’s reaction to that first proposal from
TI which incorporated ARM’s designs at the core was to come back with a list of
problems. Among these, Nokia pointed out that the ARM processor needed too much
memory because the software code was too heavy, making it too expensive. But
Nokia also recognised that there wasn’t an offering on the market that provided the
required performance and that the solutions to these problems weren’t obvious. They
were breaking new ground. So a consortium between TI, ARM, and Nokia was
formed to develop a new solution.

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As a result, ARM found itself working closely with Nokia that, as an OEM,
was its “customer’s customer” – two steps removed in the value chain – as well as its
direct customer, TI. The benefits of these kinds of close interactions quickly became
obvious: ARM gained a detailed understanding of Nokia’s priorities and needs as well
as detailed knowledge from TI about how to interface with their digital signal
processing technology and what would make a chip efficient to manufacture. The
quest to systematically capture the benefits in the future led to what ARM came to
term its “two-way partnership” model.
Whenever ARM grants a license to use its technology it develops a reciprocal
relationship with the licensee. The aim of this relationship is to get insights into the
licensee’s process technology roadmaps and access to emerging applications,
becoming a two-way partnership. Under this arrangement, ARM’s partners thus not
only boosted ARM’s sales, they also provided market knowledge and insights that
would help ARM to design processors better suited to future market and application
needs and to developments in design technologies. In return, ARM supported the
semiconductor companies by helping them develop better products through the
insights that ARM had gained by working with the OEMs.
Of course ARM’s semiconductor customers were not always happy to be by-
passed as ARM increasingly talked to the OEMs directly. Some feared that ARM’s
actions could end up commoditising their products, lowering switching costs and
reducing their lock-in and price control. Against these risks, however, many
semiconductor companies realised that by working with ARM they stood a better
chance of winning business from the OEMs than by relying solely on their own
contacts. Using ARM’s processor designs also helped them optimise their supply
chain and avoid incurring the high fixed costs involved in designing a substitute in-
house. Working together with the ARM community and participating in the two-way
knowledge flow between ARM and its partners, therefore, proved to be in their
mutual interest since this enabled them to win more business while reducing costs.
From being a small, specialist provider of IP for RISC processors, ARM has
moved towards becoming the “glue” that bound a network of partners together as well
as a magnet for knowledge fragmented between different players. Despite close
relationships with its partners, however, ARM was not in the business of creating the
bespoke designs for individual customers. Quite to the contrary, core to its business
model was an ability to come up with a single design that could be used for a variety
of applications (these may range from wireless communications through to disk drive
controllers or engine management systems) and could become a global standard
licensed to numerous semiconductor manufacturers. The same ARM processor
designs would, therefore, often end up in potentially competing end products being
offered by rival OEM’s. As a small part of the end product (such as phone) this was
not necessarily a problem – in fact standardisation of the processor might well be
advantageous to an OEM. But the ARM processor was a major element in the chip.
So the trick was to come up with a design that achieved the right balance between
ARM and the semiconductor vendor’s own differentiation around the ARM core. To
pull off this balancing act, ARM had both to understand the technologies and needs of
different semiconductor manufacturers and OEMs and then find the right trade-offs
between their competing priorities and demands to come up with a design that would
suit the most important requirements common to all. Each ARM design, therefore,
always aims at achieving the best compromise between the conflicting demands of
specific partners, and that in such a way that it will enhance the common technology
platform that ARM provides to a large cross-section of players in the industry.

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Through its partnerships ARM has a larger pool of innovative ideas from
which it can develop new products than competitors who lack an equivalent
ecosystem. This increases the likelihood of ARM’s processor designs better suited to
its partners’ future needs.
In spite of all the advantages the main risk of this model is that a licensee
decides to replace the ARM architecture with an alternative, new-generation
technology. To guard against this, ARM needs to constantly invest in monitoring its
partners to ensure its technology remains integral to partners’ evolving technological
roadmaps.

Born Global
If it were to reach its goal of becoming a global standard for RISC processor
architecture, ARM would also need to be able to understand the product and
technology roadmaps of influential OEMs, semiconductor companies and other
players right around the world. It would not be sufficient to develop designs based on
the requirements of a few local customers and then try to roll them out across the
world. But ARM faced a problem in embarking on this quest: none of the significant
potential customers or OEMs was located near its home base in Cambridge. With one
or two possible exceptions such as Plessey and ST, the key customers were not even
based in Europe. Even companies with local branches, such as Motorola and TI, made
all the key technology and design decisions back at their headquarters. As a result,
ARM had to achieve global reach almost from the outset.
ARM’s first priority was to open a window into Japan where the market at that
time was buzzing with activity in the processor technology space. By signing up a
licensee in Japan, ARM realised that it could build a critical mass for its processor
architecture and work with another group of customers with their own unique needs.
In addition, the development of Taiwan as a key location for semiconductor
manufacturing made the Asia-Pacific region critical to achieving a global presence.
For a small company from Cambridge breaking into Japan proved to be quite
challenging. However, they did find some interest among the companies they targeted.
Sharp was keen to apply its skills and experience in the flat screen display area into
the personal digit assistant (PDA) market and found ARM’s technology highly
suitable to achieve this shift. Contacts obtained within Sharp through Apple proved to
be instrumental in ARM securing the deal and establishing a beachhead in the
Japanese market.
ARM replicated this initial strategy of tapping into key knowledge clusters
around the world. By 2001 ARM had 14 offices including Texas, California,
Washington State, and Massachusetts in the USA, Germany, and France, in Europe,
as well as in Japan, Taiwan, South Korea and Israel. Today, ARM has 31 offices
spread around North America, Europe and the Middle East, Far East and India.

Nurturing a Global Ecosystem

As ARM recruited larger numbers of diverse partners in different parts of the
world and forged linkages between them, a global business ecosystem had begun to
take shape. But ARM recognised that the putative ecosystem would wither and die
over the longer term unless it was able to generate ongoing value-added for both
customers and partners. ARM therefore actively pursued initiatives to promote the
overall health of its ecosystem. ARM’s strategy is to “create a partnership with our
customers and broader community of third parties, to enable the creation of end

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products more efficiently through ARM than from any other source”. The starting
point of these initiatives was to understand the potential benefits the ecosystem might
provide two key groups of participants.
Benefits to Semiconductor and OEM partners
ARM underpinned the ecosystem by providing a reliable set of common assets
in the form of its processor technology platform, design tools and software that
evolved along a consistent road-map. All of ARM’s partners benefited from the
increased certainty that access to a solid and smoothly evolving technology platform
provides. It also enabled partners to focus their resources on leveraging the platform
to their advantage rather than reinventing the wheel.
Meanwhile, because it embodied knowledge drawn from throughout the
industry, the platform helped align the key influencers of technology and product
developments in the industry such as OEMs, and semiconductor fabricators (as well
as with ARM’s own strategy and technology roadmap).
Using an ARM architecture allowed OEMs, such as Nokia, to choose between
any of multiple semiconductor vendors who had an ARM licence. They could avoid
becoming locked in to the proprietary technology of a single semiconductor company
(such as Intel) – a particularly important advantage in a highly cyclical business
where supplies of semiconductors can be tight when the market booms, as well as an
important tool in containing costs. Using ARM’s standard architecture also allowed
OEMs to re-use much of their existing software toolkit and engineering knowledge,
thereby improving the cost efficiency and speed of developing a new product. Instead
of re-inventing the proverbial wheel, they could concentrate on developing their own
proprietary technologies on top of ARM’s base to make their products, such as a
smart-phone, to be more attractive to their end customers.
For a semiconductor company such as Samsung or TI, using a standard
architecture dramatically reduced the cost of developing a new chip by allowing much
of the $50 - $100 million fixed costs of a new design to be shared across multiple
participants in the ecosystem. The ARM ecosystem also provided a vehicle for
accessing information from OEMs about their future requirements and consolidating
this on a confidential basis and embodying this into designs and architectures
semiconductor companies could use as a core. By partnering and working closely
with ARM, they could improve both the cost and attractiveness of their offerings –
increasing the chances that their chips would be embedded into OEM’s future
products.
Benefits to the Broader Ecosystem
Apart from those OEM and semiconductor partners with whom ARM worked
very closely, the involvement of third-party companies that provided related services
such as design-tool software, testing and packaging were also important to the
ecosystem’s ongoing viability. ARM therefore cooperated with a host of software
companies to supplement its own software tool offerings by providing open access to
its protocols and interfaces. This helped these companies gain access to new
customers that use ARM technology and carve out profitable niche businesses within
the ecosystem. Over time, they benefited from the emergence of new products and
technologies elsewhere in the ecosystem that, in turn, create new business
opportunities.
The emergence of thriving niche players, meanwhile, benefited the ecosystem
as a whole by enabling greater specialisation that, in turn, led to improved
productivity and better value for money for end customers.

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ARM’s Leadership Role
By nurturing all these relationships, ARM played a pivotal role within the
ecosystem, acting as a unifying platform and frame of reference for the rest of the
industry and a stabilising influence. It promoted the spread of innovation by
incorporating product and process technology advances drawn from across an
extensive and diverse network into its designs and architecture that could
subsequently be built upon by others. At the same time, by creating and orchestrating
an ecosystem around its processor technologies, ARM was able to magnify its
influence on the RISC processor market way beyond its revenues and market share
would otherwise warrant. The difficulty competitors would have in trying to replicate
ARM’s ecosystem also created a significant barrier to entry for potential rivals
seeking to dislodge ARM from industry leadership.
By being connected with a wide variety of participants in its ecosystem, ARM
could access a steady stream of knowledge about the market trends, emerging needs
of customers, innovations in product and manufacturing process technologies. Access
to this unique combination of knowledge provided a competitive advantage to ARM
by improving its chances of creating the next generation processor technologies and
architectures that address emerging market needs.
Against these benefits, managing the initial set up costs and ongoing
transaction costs of the partner ecosystem was a major challenge. In order to foster the
development of the ecosystem ARM needed to invest in many activities that did not
contribute directly to its revenue stream, including the creation of tools and other
software necessary to design and develop new processors. ARM provided these
design tools and other support software free of charge to its partners and other third
party developers to help them become more efficient in developing new products
using its technology. This was despite the fact that many of these companies were
actual or potential competitors to ARM’s own processor designs.
The trade-off for ARM was to balance its short-term revenue and profit needs
against investment in nurturing the ecosystem and acquiring market knowledge with
long-term payoffs. Upfront licensing fees provided immediate cash while royalties,
drawn from the billions of devices in which ARM technologies were embedded,
provided profit growth. It could take anywhere from five to seven years for a new
licence to generate significant royalty revenues which then typically grew over a
period of between three and ten years. Hence the capability to establish and maintain
long-term relationships efficiently was key to making the business model viable (see
Exhibit 3 for ARM’s summary financials and market shares). One indicator of ARM’s
success here was the fact that it had maintained the percentage of its revenues
originating from royalties relative to license fees as the company had grown.

Managing Growth of the Ecosystem

By early 2009 ARM’s network of partners spanned four groups: Silicon
partners, OEM partners, Design Support partners, and Software partners. Together
this network spanned the entire semi-conductor value chain (Examples for mobile
phones and mobile computing are shown in Exhibit 4).
The Silicon partners included: integrated device manufacturers (IDM) – semi-
conductor companies that design, manufacture and sell integrated circuits, fabless
semiconductor companies – that outsource their manufacturing, and pure-play
foundries that manufacture under contract. They were a major source of income for

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ARM through the license fees and royalty income that they shared with ARM for each
product they manufactured using ARM technology.
ARM’s OEM partners included manufacturers of a wide variety of different
devices, including digital cameras, automotive systems, electronic keys, and medical
applications such as patient monitors.
Design support and software partners supplied a wide variety of products and
services that are essential to creating a new product including design and EDA tools
through to design consulting. These partnerships ensured that the ARM technology
was compatible with a wide range of design options any OEM or silicon partner might
prefer to adopt. It also reduced the need for engineers to re-train on new tools, and
reduced time-to-market for customers incorporating ARM technology.
ARM’s increasing numbers of partnerships with software providers were
aimed at ensuring that current and potential users of the ARM architecture enjoyed a
wide choice of embedded operating systems and execution environments. This, in
turn, helped facilitate the integration of ARM designs into a wide range of end-use
applications.
During its first decade ARM managed its relationships by appointing “partner
managers” each dedicated to a handful of partners (or in some cases, even just one).
The partner managers were responsible for licensing ARM technology to nominated
semiconductor partners and growing/managing the partners’ abilities to sell their
processors into OEM products. The job description of the partner manager included
“developing sound, professional, long-term relationships with management, technical,
and marketing personnel at the partner as a key role, as well as creating, reporting,
and executing on account strategies.” Another important part of the job was to
“represent a partner to ARM and provide feedback to ARM business units,
engineering, marketing, and management regarding partner technical and business
requirements,” and to “identify and capture a competitive landscape, trends,
projections, and other relevant part in the information.”
As the ecosystem grew, however, to include in excess of 400 diverse partners
scattered around the world, the approach to partnership management had to be
modified.
Differentiation between partners
As the number of partners increased ARM began to differentiate the way it
managed its relationships varied according to the partner’s size, application segment
(e.g. mobile phones versus automotive), type of technology, and influence in the
industry.
The first step was to identify a small set of “strategic partners” within each
part of the value chain and applications segment. ARM looked to its partners as a
source of knowledge about the future evolution of complementary technologies, as
well as a source of revenue. Therefore strategic partners were those ARM judged to
have the ability to influence the technological direction of the industry, either because
of their market power or technological prowess. The top twenty strategic partners
were assigned to one of ARM’s directors (the CEO and his direct reports) to manage
the overall relationship. This ensured that even where the relationship was sales
oriented, with a large ARM marketing and sales team involved, top management
leadership could balance the short-term interests of ensuring revenues with longer-
term interests of true partnership in which future technology roadmaps were shared
and coordinated.

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The second step involved splitting the traditional job of the partner manager
into a number of distinct roles performed by dedicated personnel. A “segment
marketing” organisation was created for each end-use applications area. As of 2000,
ARM grouped its activities according to eight applications segments: Wireless,
Storage, Imaging, Automotive, Consumer Entertainment, Networking, Security and
Industrial.
The segment marketing teams had the job of working out, as ARM’s Chief
Technology Officer, Mike Muller, put it “Who are the players; who matters; and what
do they want?” In the case of Samsung, for example, the segment marketing person
would be responsible for building relationships with the wide variety of individuals in
different parts of Samsung to develop a picture of their evolving needs for (say) future
mobile phones. Each segment marketing team would identify their own “top twenty”
partners who were key influencers in the likely future evolution of technologies and
products in their applications segment.
A separate sales organisation was carved out to manage the evolution
licensing and royalty deals and build relationships with “partners as customers” for
ARM’s designs. In the case of Samsung, the sales team would transact directly with
its semiconductor division, but would also develop relationships with other groups
within Samsung who might influence the role of ARM technology within its future
chips. The sales teams responsible for each application area also developed and
maintained their own “top twenty” lists. For the most part, these were aligned with
segment marketing’s key partners, but occasionally there was divergence, for example
where a partner had an important influence on future technologies, but was not itself a
large maker or buyer of chips either directly or indirectly. Qualcomm, one of the main
suppliers of IP to the mobile telephony industry, would be a case in point.
Partnerships with early stage and start-up companies, meanwhile, were
handled differently. Typically, the start-up company expressing an interest in using
ARM technology for their product made the initial contact. Here ARM operated a
“light touch” relationship where it provided them with the tools and the other support
necessary to integrate ARM technology into their products. It also offered a flexible
licensing model based on providing per-use licenses, in recognition of the fact that
building a product prototype was the primary focus on such partners. This reduced the
hurdle to using ARM technology, while allowing fledgling companies to focus
resources and improve their credibility by using proven technologies, supporting
design tools and software from ARM. Encouraging start-ups to attach themselves to
the ARM ecosystem in this way had the potential to pay handsome dividends if and
when these fledgling companies succeeded.
An important initiative that helped to cement the relationships with its partners
was the ARM Partner Meeting (APM) hosted annually in Cambridge. This three-day
event was unique to the industry as it brought together all ARM partners to a single
venue, typically one of the Colleges at Cambridge University. Although the criteria
for inviting partners had varied over the years, invitees included the OEMs and
providers of complementary products and software as well as ARM’s direct
customers. At this event, ARM’s current roadmap was presented and discussed with
various partners. In addition, parallel sessions on specific topics were also held to
smaller groups of the attendees. A large number of one-on-one meetings also
happened between specific ARM teams and partner representatives during the event.
ARMs ecosystem also involved a broader community numbering tens of
thousands of developers and other participants. These partnerships were facilitated by
the on-line “ARM Connected Community” website. Managed by a dedicated ARM

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executive, this on-line community provided free access to extensive resources for
developers, a forum for developers and engineers to exchange ideas and support from
within the ARM ecosystem, and company and product listings classified by product
category, market application and ARM technology—all linked to partner sites (see
http://www.arm.com/community).
Knowledge management
From a knowledge gathering perspective, OEMs were the focal point for ARM
since they were closest to the end customers. In developing partnerships with OEMs,
initial contact was made by one of ARM’s segment-marketing representatives through
events and other mutual references. Once initial contact was made, the key decision
makers within the OEMs for product and technology roadmaps were identified.
Detailed discussions were then initiated with them on how ARM could help with their
requirements for processors and other technologies. The team also tried to identify if
they worked with any other ARM ecosystem partners. If any such relationship existed,
further work was co-ordinated with semiconductor vendors and other influential
players within the ecosystem, as well as other teams within ARM.
By working with the OEMs, ARM created the “pull” or demand for new
products. By working with the semiconductor companies, it created designs or the
“push” to satisfy the demand. This push-pull approach was the key to the success of
ARM’s partnership model and ensured that ARM could influence the evolution of the
technology, products and processes within the industry. Among the OEMs, some may
have been keen to work much more closely with ARM in developing a new product
thereby gaining first mover advantage ahead of their peers.
As already noted, many of these OEM’s were ARM’s “customers, customers”
(see Exhibit 5). As a result, understanding and managing confidentiality issues and
building trust was critical from the start. Likewise it was important to anticipate and
manage any perceived conflicts with ARM’s own semiconductor customers who may
have been concerned that their particular chip offering may be disadvantaged if
technology roadmaps were altered as a result of discussions between an OEM and
ARM. In practice, however, ARM’s relationship management, including close
involvement of key semiconductor partners in the process, had been able to minimise
these potential conflicts so that it had faced only a handful of complaints over many
years.
With strong relationships with multiple OEMs, ARM could gain an early
indication of the how the requirements for new products were evolving. Likewise, its
relationships with semiconductor partners and other players provided a window on the
way technologies were evolving. The knowledge ARM accessed from its partner
network needed to be combined with ARM’s own views of market evolution to
identify the emerging trends for new products and technologies. The key challenge for
ARM was then: “How do you integrate and communicate the multiple strands of
information coming from the OEMs and partners?” to quote Mike Muller again. Part
of the answer lay in keeping the ultimate objective constantly in view: i.e. to develop
a technology roadmap that was what might be termed “the highest common
denominator” or “best compromise” between different partners’ requirements that can
be in conflict. The ultimate prize was to develop IP on new designs and architectures
that would then be licensed globally to a wide range of semiconductor partners to
pursue design wins (not to craft bespoke designs). Prior to investing the necessary
resources to develop new processor designs, therefore, additional validation was also
performed through contacts with industry analysts from companies like Gartner and
ABI Research.

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Other knowledge management issues that had to be addressed within this
process included: the ownership of IP, the need to “hard-wire” key elements into the
chip, controlling the proliferation of designs, and the issue of “coopetition”
(simultaneous cooperation and competition) between ARM and partners.
In many cases, by providing early access to its designs, the partner shared
knowledge with ARM. But new knowledge was also created during subsequent
interactions between ARM and its partners, the ownership of which had to be agreed
upon and monitored.
Second, the “hard-wired” nature chip designs meant that the familiar software
techniques of releasing subsequent “patches” or “service packs” to accommodate
changes in requirements was impossible. Any change meant that existing output had
to be discarded and the design process restarted – a costly process for both ARM and
its partners. Requirements had, therefore, to be understood as accurately as possible at
an early stage.
Third, as ARM expanded the ecosystem with larger numbers of more diverse
partners, the problem of divergent requirements multiplied, making it more difficult to
come up with a design that satisfied the maximum number of partner requirements
without extensive customisation. During the early days of the company, having a few
designs was adequate in order to satisfy most of the partner requirements. However,
with an increasing number of partners, the number of designs had increased even
though they were essentially the same at the core. The solution was generally to focus
on finding the right compromise between the requirements of between three and five
strategic partners in each application and establishing that as the standard.
Finally, managing cooperation could be tricky. To illustrate, ARM’s processor
division may be working very closely with a software company to develop tools that
may be a competitor to ARM’s own software product. In this case, however, the
imperative of promoting a healthy ecosystem had to take precedence. In the interest of
providing its customers with choice and maintain the vitality of its partners’
contributions to the ecosystem, ARM had to act to encourage other companies to
develop software tools around its designs and architecture, even in competition with
its own offering. ARM also had to manage its relationships in such a way that, despite
competing amongst themselves, its partners were willing to align their product
roadmaps with ARM technology in the RISC processor arena and compete on other
product dimensions.

Charting the Next Phase of Growth

The fact that both ARM’s revenues from existing royalty arrangements and
new opportunities grew automatically as its partners expanded was one of the
advantages of building its business model as an ecosystem. But what if ARM wanted
to grow faster than its ecosystem? Bill Parsons, Director of Human Resources at
ARM put the issue succinctly: “How do you break out of the centre of an ecosystem
in a way that doesn’t risk destructive competition with your partners and customers?”
ARM adopted a three-pronged strategy towards this growth issue. First, was to
grow by taking advantage of opportunities to increase the number of ARM chips per
device. The number of ARM chips per mobile phone, for example increased to an
average of 1.9 in 2008, with smartphones having between three and four ARM chips
each.

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Second, ARM sought to replicate its ecosystem model in other end-use
applications of its technology. The potential market was divided into five end-use
segments: Home Solutions, Mobile Solutions, Enterprise Solutions, Embedded
Solutions and Emerging Applications. Even by 2008 ARM estimated that its designs
were in only around 30% of the full range of chips where they could usefully be
applied. Segment attractiveness was influenced, in part, by the volume potential and
average selling prices of the chips required. Smartcards, for example, offered a
massive volume opportunity for chips that sold for around $1-$2 each, while
segments such as laptops or home entertainment systems might use $10-$15 chips,
but had lower volume potential. In deciding where to focus within each of these
segments, ARM also had to give careful consideration to the risks of destroying the
trust-based relationships with its partners. It almost always avoided moves that would
be perceived by key partners as a competitive threat. As a result, it mostly focused on
emerging niches within these segments or positioning that would complement partner
offerings, so as to avoid unduly encroaching on it partners’ territory.
Third, ARM sought to identify other stages in the increasingly specialised
semiconductor value chain where the ARM knowledge-ecosystem model might be
applied. The business it alighted upon was the supply of “physical IP libraries”.
Physical IP libraries contain the routines that specify the manufacturing instructions
necessary to create a “die” (analogous to the mould used in making plastics or glass)
to fabricate a particular processor design. As the name suggests, physical IP provided
a key link between the processor design and its representation on the “physical”
silicon. Customers have the choice of using libraries of generalised physical IP that
will work with almost any foundry. Using general-purpose libraries meant that any
number of manufacturers were able to produce the chip. But the advantage of opening
up a choice of suppliers needed to be weighed against a loss of chip performance
compared with using physical IP optimised for a particular manufacturer’s process.
One of the leaders in the physical IP business was Artisan Components Inc., a
company that had developed excellent quality libraries that were highly optimised to
the manufacturing processes of Taiwan Semiconductor Manufacturing Company
(TSMC), the world’s largest foundry. TSMC gave away Artisan libraries to its
customers and paid Artisan a royalty for each fabrication die that was built with
Artisan libraries. Artisan’s physical IP libraries proved attractive, providing users with
performance improvement, accuracy and lower costs. Artisan’s main customers were
the small companies that did not have the capability to develop physical IP in-house
and were content to be tied to TSMC.
As fabrication technology evolved, physical IP development needed to be
constantly updated, requiring new rounds of investment. These investment costs were
rising as the rate of technical change in fabrication processes accelerated and chip
design process became more complex. Even large semiconductor companies were,
therefore, expected to outsource their physical IP development so as to spread the
fixed costs and concentrate on their core competence of design. As a result, the
growth prospects of the business were good. Moreover, at a high level, Artisan’s
business model also looked very much like ARM’s, with an upfront licensing fee and
further royalties paid on the basis of the number of dies built using Artisan’s physical
IP.
ARM acquired Artisan in December 2004 for approximately $1 billion. By
combining their respective strengths in processor design and physical IP, it was
argued, ARM and Artisan together could implement the ARM processor architecture
much more efficiently and with reduced risk. ARM also believed that it could use its
strong existing relationships with semiconductor companies to grow the business by

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developing libraries for other foundries beyond TSMC. Announcing the deal,
however, ARM informed investors that realising this potential would be a “journey”
of at least four and potentially up to seven years.
Growth and integration of the acquisition was subsequently to prove
challenging. Artisan had been built by a small group of entrepreneurs who enjoyed
significant capital gains on the sale. Despite a “softly, softly” approach in which
Artisan’s Chairman and CEO joined the ARM board, by the end of the first year all of
the senior management had departed. It also became apparent that Artisan’s
development processes were relatively immature. The cultural differences were
greater than expected. In seeking to replicate its ecosystem model, meanwhile, ARM
found that progress in convincing large semiconductor manufacturers to outsource
development of physical IP was slower than expected. Existing trust was not
automatically transferable to the new business and a number of foundries regarded
proprietary physical IP as a source of differentiation in the market, making them less
willing to use generic libraries. On the other hand, acceding to calls for increased
customisation would put pressure profitability by adding to development costs and
limiting reuse. ARM was still convinced the original rationale for the acquisition was
sound and physical IP reached 16% of group revenues by the end of 2008. But
reaping the full potential envisaged was proving a long haul.

Divisionalisation
Growth of the ARM’s business, including the Artisan acquisition, meant that
the company was becoming increasingly unwieldy, based on its existing structure that
was essentially comprised a large number of project teams interacting across a single
organisation. In order to manage itself more effectively, ARM decided to restructure
into 5 divisions, each focusing on a specific aspect of its business. The defining
moment came in July 2005 when the Processor division was created, encompassing
the core ARM processor business. Other business divisions were Physical IP,
Multimedia, Software Tools and Services and Manufacture.
The company was still dominated by the Processor division which provided
around 50% of the total revenues. As Bill Parsons, commented, “It was part of letting
go and from that day, the Processor division became another child among the five.
Both within ARM and with the customers, we had to get used to the new way of
running the business.”
With the company reorganised around specific divisions, it became imperative
to balance the needs of each individual division versus the others. With a growing
ecosystem comprising both large number and greater variety of partners, quite often
there were instances where one division was working with a partner who was also
competing against another division in the market. Resource allocation on the basis of
short-term profits alone may not be in ARM’s long-run interests. It was therefore
important to get divisions to look beyond their immediate needs and work towards the
company’s overall vision.
With this objective in mind, ARM’s revised organisational structure was set
up in such a way that each division did not become a silo. Members from the senior
executive team were also part of the boards of each individual division. This ensured
that both the corporate and divisional objectives of the company were considered in
any strategic initiative. The formation of a cross-functional Product and Project
Approval Team (PAT) at the corporate level to decide on projects to be undertaken

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was a further a step in this direction. A similar set-up was also replicated within each
division so that the process was consistent across the organisation.
Another challenge that ARM faced as it grew was to ensure that the
knowledge and skills specific to each division were available across the divisional
boundaries. Its complex ecosystem of partners meant that quite often the necessary
intelligence across markets, technology and customer relations was spread among
multiple groups across the organization. However, accessing this intelligence had to
consider confidentiality and justify the trust that its partners placed in ARM.

Succeeding in the Future

Looking to the future ARM had to contend with a rapidly evolving market
with OEMs seeking to shorten their product development cycles. This demanded that
the ARM ecosystem participants integrated their technologies more quickly so as to
respond rapidly to changes in the market and shorter payback periods while coping
with rising R&D investment in each new generation. Some argued that future winners
would be larger, more vertically-integrated companies that could internalise the
product development cycle to increase its speed and more effectively spread the fixed
costs.
Beyond these trends, one of the most significant shifts was the emergence of
“mobile computers” (a generic term that came to be used for everything between a
smartphone and a PC). These devices took advantage of the increased bandwidth
available through the 3G spectrum and new software applications and as so were
being touted as future replacements for the ubiquitous laptops. One example was the
emergence of so called “netbooks”: very small, light portable computers designed to
utilise the power of the Internet rather than weigh down the device with on-board
processing power and data storage, selling for between $250 and $600 per machine.
Qualcomm and Freescale, among others, developed ARM-based chips to power
netbooks. This brought ARM and its ecosystem into competition with the archetypical
large, vertically integrated player: Intel and its newly launched Atom processor which
had been designed specifically with the aim of winning share in the market for mobile
devices and had since been used in a number of netbooks.
Given its dominance of the market for chips powering PC, Intel had already
learned how to optimise its designs to work with browsers and a plethora of “plug-
ins” that extended their capabilities into audio and video. The availability and
optimization of these types of applications to work with ARM’s processor
architecture was critical to ensure that OEMs design future mobile devices
incorporating it. This involved identifying what type of software support and
compatibility was required when products using new technologies were introduced in
the market.
In ARM’s traditional ecosystem such a task would be fairly routine since it
worked closely with OEMs and partners across the value chain in aligning their
technology and product roadmaps. However, in the mobile computer space, the range
of such partners was much broader, extending into pure-play software companies such
as Google and Adobe and open-source developer communities where Intel already
had strong links. Despite these hurdles, ARM did make progress: when Google
created its Chome operating system it designed Chome to run on chips with an ARM
core as well those traditionally used in personal computers. Likewise Adobe had
adapted their software to run on ARM-based as well as Intel chips. But notably

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Microsoft had not adapted its PC software to run on the ARM platform (although
Microsoft Windows Mobile has long done so).
Meanwhile Intel’s R&D efforts were geared towards building faster
processors. Intel also engaged in marketing efforts that promoted chip speeds as a key
advantage thereby influencing consumers to value processor speed over other
performance criteria. ARM’s strength was on low power consumption and efficiency
but sometimes running at half the speed of an Intel processor.
Another important difference was that Intel’s approach towards working with
partners such as the PC manufacturers was that of a powerful supplier vs. customer
relationship (see Exhibit 5). Through its dominant market position, Intel influenced
the evolution of the market in line with its product roadmap. In a recently publicised
lawsuit, evidence had been unearthed showing Intel influenced its clout with
Microsoft to change its Windows Vista requirements so that Intel could continue
shipping an earlier design graphics processor. The contrasted sharply with ARM’s
model of working very closely with OEMs and its partners to help them develop their
own roadmaps and align its own technology roadmap with what was happening in the
market.
Whilst Intel had established the Centrino mobile processor as the dominant
standard for laptop/notebook computers, establishing a similar position of strength in
the fast growing segment of smart phones might prove to be a bigger challenge. The
mobile phone industry was more complex with a much wider array of companies that
play a significant role in value creation. A good example was Apple’s iPhone. The
iPhone used at least three ARM processor cores, including the video/applications
processor design based on an ARM processor core licensed to Samsung. At least 10
different companies had developed the core components necessary to build the iPhone.
These ranged from major companies such as Texas instruments, ST Microelectronics
to smaller companies, virtually unknown outside the industry, such as Balda, a
German company that supplied the touch screen (See Exhibit 6).
As Warren East and his team looked to the future a key question, therefore,
was which business model might have the advantage: a broad, “multipolar” ecosystem
or a dominant, vertically integrated leader? If the latter was to win out maybe ARM
should consider merging with the likes of TSMC?

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Exhibit 1 – Evolution of the Semiconductor Industry

EDA= Electronic Design Automation

Fab = Fabrication of semiconductors

ASIC = Application Specific Integrated Circuit

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Exhibit 2 – ARM’s Role in The End Product

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Exhibit 3 - ARM Financials

FY 2008 – Financial Summary

Normalised* US GAAP

£M FY 2008 FY 2007 % FY 2008 FY 2007

Change

Revenue 298.9 259.2 15% 298.9 259.2

Income before income tax 100.8 86.7 16% 64.8 48.2

Operating margin 32.6% 31.4% 20.6% 16.5%

Earnings per share (pence) 5.63 4.67 21% 3.68 2.70

Net cash generation** 91.2 57.1

Effective fx rate ($/£) 1.83 1.98

Application Segments in 2008

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Exhibit 4 – ARM’s Ecosystem

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Exhibit 5 – Value Creation in Processors

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Exhibit 6 – Apple iPhone Components

Hardware Component Manufacturer ARM Connected

Community
member?
Video/Applications Processor Samsung Y
I/O Controller Broadcom Y
Multimedia engine Infineon N
GSM RF transceiver Infineon N
RGB display interface serializer National Semiconductor Y
Li-Polymer battery Amperex Technology Limited N
(possibly multi-sourced)
Power management device Texas Instruments (TI) or Y
National Semiconductor
CMOS imager Micron N
NAND flash memory Samsung Y
Mobile DDR SDRAM Samsung Y
Wireless connectivity device Marvell Y
SRAM Intel Y

Sources: EETimes and TechOnline

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