Inside nearly every smartphone, tablet, e-reader and smartwatch are tiny microprocessors that tell the machine what to do. Small pulses of energy move from a gadget’s battery through millions of tiny transistors, triggering commands and responses in nanoseconds, be it playing games, posting to Facebook, sending texts, or taking pictures.
ARM Holdings PLC., which internet giant SoftBank Group Corp. on Monday agreed to buy for $31 billion, is the world’s biggest designer of these semiconductors. Founded in 1990 in Cambridge, and today employing about 4,000 people, the company focuses on small, low-power devices, while industry leader Intel Corp. leads in desktop and laptop personal computers.
The market moved in ARM’s favor as mobile phones began to proliferate. Now its designs are inside more than 95 percent of the world’s smartphones — including every iPhone and Samsung Galaxy product — accounting for an estimated total of 45 percent of ARM’s sales. Televisions, medical equipment, cars and internet-connected home appliances also use its designs.
The ubiquity of ARM’s chips, and its related patent portfolio, led SoftBank to offer such a large sum for the company. But unlike Intel, ARM does not actually manufacture semiconductors. Instead, it licenses its designs to companies such as Samsung Electronics Co., which own the fabrication plants required to manufacture the parts. The business strategy is immensely lucrative, freeing the company of the costly job of building such plants, which can cost $1 billion or more to construct.
ARM customers shipped roughly 15 billion products with ARM chips inside in 2015, the company said in its annual report for that year. Roughly 52 percent of its customers are in Asia, 38 percent in the U.S., 9 percent in Europe and just 1 percent at home in the U.K.
In 2015, the company earned £339.7 million ($450.3 million), on sales of £968.3 million. It spent £285 million on research and development last year, according to its annual report.
ARM started as a small team recruited by Apple Inc. to build power-efficient chips for its Newton tablet in 1990. The Newton flopped, but ARM continued to work on its designs. The bet paid off: As mobile products overtook PCs as the preferred method for personal computing, ARM benefited enormously.
Designing chips is time-intensive and technically challenging work. Architects map out the direction and function of each transistor, essentially telling a device how to respond to a user’s commands. It is like designing an intricate electronic city. If any elements are incorrectly placed, the device will malfunction.
“You get one transistor wrong, it’s done, game over,” Johny Srouji, Apple’s head of chip design, said in an interview earlier this year.
ARM has excelled as a designer-for-hire, creating systems for other companies to plug into their devices. This frees the customers from having to hire a team of engineers to build something from scratch. Even so, the company is being challenged because of plateauing demand for smartphones, impacting ARM customers such as Apple.
The company has been expanding into automobiles and chips used inside servers to help make up the difference, but the cost of the research and development is high. Selling to SoftBank may give the company a longer runway to build products for emerging technologies, including future automobiles.
“This move by ARM is recognition of the limits of this current market and the need to invest to expand beyond PC and mobile into the multitude of consumer home, building, car and other platforms emerging,” said Mark Skilton, a professor at Warwick Business School in Australia, who studies the technology industry.
Simon Segars, the company’s chief executive officer, said in February that computing power in cars will jump 100-fold by 2020. Each car will then have an average of $150 of silicon chips, or at least seven times as much as the average smartphone.
SoftBank Chairman Masayoshi Son sees ARM’s future in being inside the legion of products that are becoming internet-connected, from street lamps to air conditioners, washing machines to drones — so-called “internet of things” devices.
“I believe IoT will be such a big opportunity for all mankind and for all the products in the consumer world,” Son told a news conference in London on Monday.
“One of the biggest paradigm shifts is coming,” Son said. SoftBank sees ARM as its way to profit from the internet of things, he added. “The internet will interconnect everything, everything that has a semiconductor inside,” he said. “Any consumer electronics, any automotive, any infrastructure in the society, they will all get connected, that is my view.”