ARM chips with everything, says Microsoft

Happy New Year to the techies at ARM - the next version of Microsoft Windows will run on its UK-designed chips...

by Andrew Saunders
Last Updated: 21 Dec 2015
The announcement came as the huge CES gadget show in Las Vegas opened yesterday. And although it had been widely predicted, the news still sent ARM’s share price up another 10%, making it the FTSE’s biggest riser for two days running.  

So why is this such a big deal? Well for starters, the fact that Microsoft is becoming one of your biggest customers would be cause for celebration at any mid-cap tech biz. But ARM already has Microsoft (and Apple, Samsung, Yamaha et al) on its client list. The big news is what this means for ARM’s future.

The Cambridge based chip designer (which makes money from licensing its designs rather than actually making the actual chips) has been flying high for the last year: it has 85% of the mobile phone chip market and its share price has risen 140%.

But having dominated the mobile market so comprehensively, investors may have started to go off the stock without something new on the horizon. The Windows deal is a huge boost in that respect: Microsoft’s operating system has until now always been primarily a desktop PC, Intel chip-based affair. The fact that Windows 8 will be designed from the start to be a mobile and desktop system gives ARM a foothold in a brand new market, which although smaller than the mobile sector is much higher-margin. It’s also the first time that ARM has pinched anything like such a big chunk of potential business off Intel, by comparison with which the UK firm is an absolute minnow. ARM’s turnover is around £300m, Intel’s more like £26bn...

For Microsoft, the deal is also strategically significant. It may be a sign that it intends to broaden its relationship with chipmakers - more bad news for Intel. And it's a big clue as to its future intentions; having a single OS, which can in essence be run on everything from a mobile phone to a network server via netbooks and tablet PCs, will position it very well to take advantage of the proliferation of new devices currently in the pipeline. It should also help to make compatibility between large and small Windows devices (never as good as Apple’s seamless synchronisation) smoother and slicker than ever before. What’s not to like?

So what about the takeover speculation that is never far in the background where ARM is concerned? The most-named potential suitor is Apple, which already uses ARM chips in iPod, iPhone and iPad. Indeed, it’s a moot point as to how much of that spectacular share price performance is due to bid rumours ramping the price. With apologies for fence-sitting, it could go either way. Closer ties with Microsoft might put Apple off, but are equally likely to make the famously determined Steve Jobs even keener to buy. And now ARM is well and truly on Intel’s radar, it could be having a look too – although we suspect the regulator might have something to say about that.

ARM CEO Warren East steadfastly maintains that it makes no sense for ARM to be owned by any of its big customers, because its independence allows it to service the whole market without favour. It’s a good point, and here at MT we certainly wouldn’t want to see another star of UK plc fall to foreign hands. Indeed, we named ARM as one of the Best of British in a recent feature. But if the price is right, everything is for sale these days...

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