Nvidia promises British authorities it won’t strong Arm rivals after proposed merger

We're just two chip businesses, standing in front of the regulators, asking them to love us

The UK's Competition and Markets Authority (CMA) has published Nvidia and Arm's responses to its renewed probing of the proposed takeover of Arm by Nvidia.

Unsurprisingly, Nvidia rejects that it would block access to Arm's intellectual property from competitors, and the pair claim that the alternative scenario of Arm spun-off from present owner Softbank would be unable to make sufficient R&D investments to ensure its future viability.

Last year, the UK government tasked the CMA with looking deeper into the proposed $40bn acquisition after the watchdog raised in a report misgivings from customers and other industry players. These groups feared move could harm competition. In particular, rivals were worried that Nvidia might lock them out of licensing Arm's designs for its widely used processors.

Nvidia and Arm's response [PDF] to that report, and the decision by the Secretary of State in November to block the deal for now, was published this week while investigations continue.

It seems Nvidia and Arm are not best pleased with the situation, and warned that while they are tied up dealing with regulators, Arm's competitors are not just sitting still but also expanding their offerings and exploiting the uncertainty surrounding Arm's future.

The response reveals that the two chip businesses are also somewhat scornful of the alternative scenario to Nvidia's takeover of Arm, which would see the British chip designer spun off from SoftBank as a standalone company once again, stating: "The vision of Arm that the decision describes — an entity that ignores its profit motive and has no competition — is a mirage."

Nvidia and Arm argue that in such a situation, the capital markets would demand profitability and performance, and this would result in pressure on Arm to narrow its focus and limit investments. In other words, it would be expected to make cuts in order to deliver shareholder revenue.

The response cites Arm's CEO Simon Segars saying: "We contemplated an IPO but determined that the pressure to deliver short-term revenue growth and profitability would suffocate our ability to invest, expand, move fast and innovate."

Let us at Intel and AMD!

Arm has been attempting to gain a foothold in the data center market for many years as the mobile market, its largest source of revenue, is effectively saturated.

However, the report notes that the data center and PC markets are a very different kettle of fish. These are dominated by giants such as Intel and AMD that benefit from an enormous established ecosystem of developers, software, and systems, and are vertically integrated in a way that allows those chip goliaths to make massive R&D investments.

The response states that "Arm does not have the systems building expertise, the software engineering scale, or the R&D resources of x86 vendors like Intel and AMD. Even under the most optimistic projections, a standalone Arm could not generate the revenue necessary to invest and compete toe-to-toe with the entrenched x86 incumbents."

In contrast, the two companies present a rosy view of the future if the proposed takeover is allowed to proceed. The move will "materially change Arm's incentives and opportunities. In contrast to a standalone Arm, the Merged Entity would have every incentive and the ability to dramatically increase investment in Arm R&D across the board, rather than facing the difficult choices of where to de-invest and face further customer and competitive pressures."

This reasoning is based on the contention that there is little overlap between Arm and Nvidia, and therefore their respective businesses are complementary and relate to different areas of the semiconductor value chain. Arm's business is focused on licensing its IP to chipmakers targeting smartphones and other mobile devices, while Nvidia's business is in manufacturing graphics cards for gaming and GPUs for data center applications.

Addressing the concerns that a post-takeover Nvidia might stifle competition, the two firms claim they would have no incentive to do so. They argue that Arm licenses IP for products that typically do not come to market for years. As a result, any foreclosure strategy would not benefit Nvidia's downstream sales for years, but would have the effect of immediately reducing Arm's licensing revenue and therefore damaging Nvidia's investment.

The report also repeats assurances from Nvidia that it would keep faith with the promises it has given to Arm and its customers. These include that it will implement an open licensing programme, with equal and early access available to all Arm licensees, expand Arm's R&D in the UK, and continue to support Arm's product roadmaps.

However, even if the UK's competition regulator is swayed by all of these soothing assurances and decides to green light the sale of Arm to Nvidia, other territories still have their respective concerns. Nvidia and Arm still have to contend with the EU, US and China all closely scrutinizing the deal and examining any potential impact that it might have. ®