ARM's strength

Most of the world's portable gizmos use technology based on the chip architecture of this British-founded research firm, joint winner in the 'Capacity to innovate' section of MT's Most Admired Companies Awards (in association with Mercer Human Resource Consulting). Its success comes from licensing its intellectual property. Dave Waller explains.

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Last Updated: 09 Oct 2013

Back in the early '80s, when personal computers were making their first tentative moves into our low-tech lives, the nation's homes and classrooms were full of the Acorn Archimedes (and its Acorn sibling, the BBC Micro), chugging away at sums that wouldn't trouble a modern calculator. These were times when a game of Asteroids was the height of excitement. Nowadays, US giants like Microsoft, Intel and Apple have changed the technological landscape - kids are born seemingly grasping for their iPod and 3G mobile phone, while a laptop computer can design a fully functioning car with less sweat than an Archimedes would work up drawing a 2D spaceship. And those good old British computer pioneers? They would seem, at first glance, to be a thing of the past.

Look again. Last December, when Britain's business leaders voted in MT's annual Most Admired Companies awards, in association with Mercer Human Resources Consulting, they bestowed the innovation crown on ARM Holdings, a Cambridge-based firm that emerged from the ashes of Acorn in 1990. ARM's micro-processing brainpower can be found in everything from your iPod to your GPS and the car's anti-lock brakes. Your mobile may have 'Nokia' written on the case, but a chunk of its workings probably began life in 'Silicon Fen'. About $22 billion-worth of ARM-based microprocessors were shipped last year, and the company's designs form the guts of 90% of the world's mobiles. That's not a bad result - especially for a company that set out 17 years ago with, in the words of co-founder and long-time figurehead Sir Robin Saxby, 'only myself, 12 engineers and £1.75 million'.

Advanced Risc Machines (whence 'ARM') - as the company was catchily known at first - grew out of a joint venture between Apple and Acorn, conceived to develop Acorn's Reduced Instruction Set Computing (Risc) microprocessor. For us non-eggheads, this is basically a cheap, small chip that tackles complex calculations by performing a series of simple ones. The result: compared with a flashier chip that does everything in one go, it's faster and takes up less space and energy.

Of course, it may be less versatile than an Intel-style microprocessor, but it's a perfect fit for today's smart - and all-pervasive - mobile phones and portable gizmos. Hence, while Acorn's computer wing crumbled, no match for the might of Microsoft's Windows (the company pulled out of the PC market in 1998), its technological mastery would continue to grow: IP - intellectual property - rather than physical PCs became its thing.

Even in the early days, when the chip sat at the heart of those Acorn Archimedes boxes, Saxby had global ambitions. Everyone, he said, would one day use ARM's Risc technology. 'Robin used to say we'd shift 200 million units in 2000,' adds Warren East, the company's chief executive. 'No-one really believed that, even Robin in his quieter moments. I can remember laughing at it too. Actually, in 2000 we shipped something closer to 400 million.'

Saxby is certainly a good advert for the benefits of positive thinking. When he stepped back to become emeritus chairman in October 2006, ARM was worth £1.6 billion, had offices and design centres from Shanghai to Sunnydale, California, and had created the most widely used 32-bit microprocessor family in the world. Ask Saxby about the success and his pride is barely disguised. 'I was down in Morocco recently,' he says. 'The people didn't have cars, they had donkeys. But everyone had a mobile phone with ARM technology in it.'

It's still a smallish firm (1,700 staff worldwide), but Saxby isn't exaggerating about its reach. Shipments of ARM-based chips are expected to hit a phenomenal 4.5 billion by 2010.

This will perhaps come as a surprise to the average punter. Most people don't know their ARM from their elbow. So why the low profile? Well, the firm itself doesn't actually manufacture anything. Instead, Saxby made an early decision to abandon manufacturing in favour of licensing its designs for others to use: intellectual property again. ARM makes its money by selling designs to semiconductor firms, Intel included, and taking a cut - 6-60 cents in the case of mobiles - every time these companies supply the chips to the gadget manufacturer. Then there's another royalty every time a gadget containing an ARM design is sold.

The licensing approach has proven vital to ARM's success, but it was born not so much of strategic genius as of a basic instinct for survival. At the start, licensing was simply a clever means of getting the opposition onside. 'With no resources, you can try and take on the world, but you won't get very far,' says East. 'Hence our approach of turning enemies into friends.

'Now we can achieve £22 billion of sales because there's a whole lot of friends' effort and technology going into it. Although we're only 1,700 people, there are probably 17,000 people worldwide putting their efforts into working with us, not against us.'

ARM-based products are available through 190 different semiconductor companies in what East calls the 'connected community'. This leaves ARM with a less capital-intensive footprint and the freedom to concentrate on what it does best: design.

It's a highly effective business model, which has other benefits too. Like Microsoft with its Windows platform, ARM owns the rights to the technological standard in its field, and is able to create a whole world - the technological relationships in addition to the chip - around its designs that pulls other companies in.

Semiconductor firms or designers of operating systems are drawn to the ARM architecture because of the compatibility it gives them with so many other ARM-based systems. A network of 300-400 technology firms out there makes it easier for semiconductor companies and equipment manufacturers to work with the ARM technology. It's a large-scale, company-level version of how the individual PC user comes to 'choose' Windows over a Mac. East calls it 'the path of least resistance'. Once a customer is in, it makes little sense to switch to a competitor.

The ARM design world therefore seems too well entrenched to be supplanted with ease. For a new challenger, this network of 400 companies committed to ARM represents an almost insurmountable barrier to entry. And with every new company that goes with ARM, its draw becomes even more powerful. 'We just need to keep the wheel turning,' says East. How will it do this? 'Keep producing,' he says.

The company seems surprisingly unfazed about the challenge of piracy. If a dodgy outfit in China is ripping off its designs - which has happened - ARM is sanguine: the pirate chips are still being sold to designers who then build around the ARM architecture. East likens it to guerrilla marketing. 'At least people are cloning our products, not someone else's,' he says.

As an attitude, this is reminiscent of Saxby's early approach to competition - taking adversity and making it work to the company's advantage. Yet that's not to say ARM's road is always rocky. Far from it: take the prevalence of mobile technology these days. Walk 100 yards and half the people you pass will be engrossed in a text message, MP3 player or PlayStation Portable. As mobile phones have become a commodity in the past few years, so iPods have been marketed as the must-have lifestyle accessory of the moment. Last month, total sales of the trendy music players topped 100 million, setting the ARM tills ringing. A cynic would say that ARM simply happened to turn up in the right place at the right time, with a small, fast, energy-efficient chip in its hand.

East is quick to counter this. Without brains like ARM's developing the technology, he says, the products wouldn't be what they are today. ARM has chips in about 70% of the world's digital cameras. If it didn't, cameras would still be available, but at more like £400 each. Companies like ARM are driving the technology on and, crucially, making it cheaper - and more user-friendly. 'Technology has got to a stage where it's not getting in the way for consumers as much as it used to,' he says. 'Our technology enables greater intelligence in the product - hence less is required by the user.'

All of which catapulted ARM, at the height of the dot.com boom in 2001, to a value of more than £3 billion. At that stage, the three top-paid bosses in the UK were all at ARM. And Saxby made £21.8 million by exercising his share options. Since those heady heights, however, its star has settled somewhat.

Despite not generally manufacturing anything (but see Artisan exception below), its fortunes remain tied to consumer spending. If the economy hits a rough patch and people stop buying non-essentials like digital cameras, then ARM's royalties will reduce too. Hence in recent years you could often see the company cutting revenue growth estimates one minute and then, particularly in the run-up to Christmas, suddenly posting record sales.

Indeed, its relationship with the stock market has been rather tumultuous since Saxby floated ARM in 1998. Not least three years ago, when it made a move into manufacturing by buying up US firm Artisan for £540 million. ARM shares crashed 18%. Many analysts said the price was too high.

The deal raised a lot of eyebrows at the time. East acknowledges this, but is insistent that the move complements ARM's traditional offering. Artisan makes building-blocks for semiconductors, the pieces that go into making the chips - what's known as physical IP (the paradoxical 'physical intellectual property'). The thinking is that ARM will be able to provide semiconductor companies with both the designs and the pieces with which to realise them; and to supply its full existing customer base - 90% of the microprocessor industry - rather than the much smaller section of the market that Artisan had addressed before. Looked at that way, it's a tantalising prospect.

In the end, it all comes down to delivering products the world wants. Of course, one day a breakthrough could come along and completely change the game. This is the technology world, after all. For now, it's a matter of keeping the quality of the offering up, and not abandoning the search for innovation.

'While I can sit here and extol the virtues of our business model, it's not worth anything if our products aren't up to snuff,' says East. 'I've painted a positive picture, which works fine as long as we continue to innovate.' He is surely a devotee of Saxby's old mantra: 'Obsolete yourself before your competition does.' ARM allocates a high spend to research and development - a hefty 25% of its outgoings - through which it plans to ensure its designs stay innovative and ahead of the game. 'People will buy our products as it's the path of least resistance. Obviously, if our products are rubbish it becomes the path of high resistance, so we have to continue to make good products,' says East.

For starters, this means supplying more chips to phones. Basic models are taking the ARM technology into developing markets like China and Brazil. In the western world, the future is smarter models, which require more microprocessors: where there may previously have been one chip, now, with video and internet facilities, there may be four. East won't talk about ARM designs in Apple's high-profile iPhone (due to launch this June), but they're in there. The other avenue is through markets outside mobile phones - anything from MP3 players to printers to chip-and-pin machines.

Prospects for the future are looking good, and that hasn't been lost on analysts monitoring ARM on the stock market. 'We continue to expect ARM to grow at more than 15% for the next six to eight years,' says Scott Geels, an analyst at Bernstein, 'and at 15-18%, versus the industry average of low single-digits in 2007.'

It's easy to see where this growth is going to come from. There are currently 10 billion processors out there, and ARM's intelligence is only in a quarter of them. 'In a way we've barely scratched the surface,' says East. Just the approach ARM's founders would have taken.

The Acorn has grown into a mighty oak.

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