SoftBank Bets on a Nascent Field With Its Deal for ARM Holdings -- WSJ

By Stu Woo in London and Don Clark in San Francisco

SoftBank Group Corp.'s $32 billion wager on ARM Holdings PLC hinges on the British chip designer's promise as a leader in the so-called Internet of Things, a nascent field connecting everyday items, such as lightbulbs, to the web.

So far, though, the market for such devices is small. Revenue per sale is tiny. And it is unclear whether ARM can exploit the industry in the same way it has dominated the global smartphone business.

"It's not a given that everything else in the world is going to run on ARM," said Rob Chandhok, a former Qualcomm Inc. executive who specializes in the sector. "It's not a bad bet, but it's still a bet."

Many SoftBank investors agree. Shares fell 10% in Tokyo on Tuesday, a day after the Japanese internet and telecommunications group disclosed its deal to acquire ARM.

ARM was founded in 1990 and is based in an office park in Cambridge, England, a centuries-old university town. Far from a household name even in the U.K., the company is an important competitor in the mobile-device industry -- designing the basic architecture of about 95% of the world's smartphones.

More recently, it has pushed to become a dominant designer of a new breed of chips for the Internet of Things, or IoT, in industry parlance. These chips are aimed at processing and wirelessly transmitting data for a range of devices, including smartphone-controlled thermostats, child-tracking bracelets and web-connected refrigerators.

But markets for many such "smart home" devices are still niche, with high price tags hampering wider adoption by consumers so far. Wearable computing devices, another IoT focus, are still more popular among technology enthusiasts than among mainstream consumers.

Total industry revenue from IoT chips totals a few billion dollars each year, estimates Malik Saadi, the managing director at research firm ABI Research. That compares with the $80 billion smartphone chip market.

While companies such as Intel Corp. design and manufacture chips, ARM is strictly a designer. It charges licensing fees and per-chip royalties to other companies that use its schematics. Customers such as Apple Inc., Qualcomm and Samsung Electronics Co. began flocking in the past decade to ARM-based chips because they drew less power than competing chips from the likes of Intel, which made high-performance but energy-guzzling processors.

Intel has closed the gap in energy efficiency, but it hasn't countered the sheer volume of ARM licensees, all of whom compete on price and new features. ARM says some of its processors have been licensed by hundreds of companies. About 14.8 billion chips containing ARM technology were shipped last year.

ARM has made some significant beachheads in new markets. It has built a 90% share in total automotive "infotainment" processors, for instance, said Mr. Saadi at ABI Research.

SoftBank is now betting that ARM-designed chips will take off with these new markets. Andrew Frame, ARM's director of agriculture, said recently during an interview in Cambridge that his current project is trying to understand how farmers can use gadgets to better monitor their soil and livestock.

"Everything will be connected," said SoftBank Chief Executive Masayoshi Son, announcing the deal in London on Monday. "Cows would be connected, chickens would be connected, the sheep would be connected."

If a significant market does take root, ARM's other big challenge is squeezing enough cash out of it.

The company keeps royalty rates low to court customers and spur demand.

"ARM likes to be in businesses where there are millions of units," said Mr. Frame.

For the first quarter of 2016, the company reported $191.9 million in processor royalties from 4.1 billion shipments, an average of 4.7 cents per chip.

Analysts estimate that a smartphone chip in a high-end phone costs about $40 in components.

A tiny microprocessor in an internet-connected lightbulb could cost just 50 cents, said Kris Flautner, the head of ARM's IoT unit, during a recent interview. That translates into ARM potentially earning just fractions of a penny on each unit sold.

"The average selling price is going to be somewhat lower than for mobile phones and computers," said Mr. Saadi.

Write to Stu Woo at Stu.Woo@wsj.com and Don Clark at don.clark@wsj.com

(END) Dow Jones Newswires

July 20, 2016 02:49 ET (06:49 GMT)

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