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As Arm plays chicken with Qualcomm, both have a lot to lose

High risk means high reward ... well, usually

Analysis When Arm made the bold move to sue Qualcomm last year, the British chip designer set itself on a collision course with one of its largest partners. The legal battle risks dealing significant damage to both companies — unless they decide to reach a settlement before things get too ugly.

In its lawsuit filed against Qualcomm last August in America, Arm sought to block custom processor core technology acquired by the Snapdragon giant. The reason Arm believes this should happen? Qualcomm allegedly breached Arm's licensing agreements by continuing development of custom cores after the two parties failed to negotiate a new deal for the tech's use.

Qualcomm, by contrast, believes its existing agreements with Arm cover the custom cores it gained from the 2021 acquisition of chip startup Nuvia.

If Arm's lawsuit is successful, it would significantly stifle Qualcomm since the company plans to use the Nuvia technology for future chips in several major market segments. But to some analysts, Arm could suffer more than Qualcomm in the long term if it wins, making the lawsuit a risky move, even if it's based on sound legal reasoning.

How the lawsuit could hurt Qualcomm

Let's suppose Arm successfully compels Qualcomm to destroy all of its custom Nuvia cores. In that scenario, Qualcomm would lose tech it believes can rival Apple's homegrown, Arm-compatible M-series chips for Macs, and can create greater competition against the Intel-AMD x86 duopoly in Windows PCs.

It's important to note that the trial for the lawsuit is set to begin on September 23, 2024, as ordered last month by US District Judge Maryellen Noreika, who's presiding over the case in Delaware.

Then we need to consider that Qualcomm expects to begin shipping custom Nuvia-designed cores in Snapdragon system-on-chips for laptops by the end of this year or early 2024.

That means, in the case of an Arm legal victory, Qualcomm would have to destroy its custom Nuvia-derived cores long after they're expected to land in chips for laptops.

This, in turn, would likely halt Qualcomm's best chance at gaining more PC market share against Apple, Intel, and AMD, at least for quite a few years. After all, one major reason Qualcomm acquired Nuvia in the first place was so it could become more competitive in the PC processor space, where its efforts to date with Arm's off-the-shelf cores have been middling at best.

"I think Apple is the biggest indirect beneficiary of this because the Nuvia product has been the one that shows the most promise of being able to offer something exciting and competitive at that level," Daniel Newman, CEO and principal analyst at The Futurum Group, told The Register.

Qualcomm's broader chip efforts for the future would suffer too in the case of an Arm legal win since the company has been planning to use the custom Nuvia technology to replace the need for Arm's off-the-shelf-designs in other areas, like smartphones, IoT devices, and servers.

And that doesn't touch upon Arm's threat of terminating all of Qualcomm's license agreements because of the Snapdragon giant's alleged rule breaking. If that were to happen, Qualcomm's business would essentially come to a screeching halt, since so many of its products currently rely on Arm technology.

How the lawsuit could hurt Arm more

"If somehow they get cut off, Qualcomm would be essentially out of business," Jack Gold, principal analyst at J.Gold Associates, told The Register.

If Qualcomm were to lose the custom Nuvia technology, the outcome would hurt Arm as well since the company would miss out on the opportunity to receive royalty payments from Qualcomm for every Nuvia-based SoC shipped in a device.

"The problem for Arm is that even if it wins the case, it loses," wrote Linley Gwenapp of TechInsights in an editorial published last month. "The company is seeking new revenue streams, and Windows PCs are a big opportunity. This market is served almost entirely by x86 processors from Intel and AMD, so any incremental share benefits Arm through royalty payments."

In the event that Arm decided to terminate all of Qualcomm's license agreements, that would do much greater damage to Arm's royalty and license revenues since the Snapdragon giant is such a major customer of the British chip designer.

But Gold doesn't think Arm would resort to such an extreme measure. "Arm would be cutting their own throat if they did that," he said.

He also doesn't think the court would compel Qualcomm to destroy its custom Nuvia cores. Instead, he thinks the court more likely would force Qualcomm to pay Arm a higher royalty rate for the Nuvia cores, which is what Arm was seeking before negotiations broke down.

"Judges don't usually shut down businesses unless they're really egregious, and this is a royalty dispute," he said.

The greater risk posed by Arm's lawsuit, Gold and other analysts believe, is that it will push Qualcomm and other chip designers to consider the open-source RISC-V instruction set architecture (ISA) as an alternative to Arm, creating a greater existential threat to the British chip designer in the long run.

While the RISC-V ecosystem isn't nearly as mature as Arm's, the ISA's open-source nature means it doesn't require license agreements, reducing the risk involved, according to Gwenapp.

Gwenapp added that other companies now face uncertainty with how their Arm licenses will be treated because of how the British chip designer terminated Nuvia's architectural license instead of allowing it to transfer to Qualcomm.

"In a world where Arm is willing to arbitrarily withhold vital intellectual property in such deals, startups and investors must worry that any Arm license creates the possibility that a successful exit could be unilaterally blocked. If Arm is willing to inflict billions of dollars of damage on one of its best customers, other customers must be concerned about their own license agreements," he wrote.

Gold said even if Qualcomm gets to keep its custom Nuvia cores in exchange for paying Arm a higher royalty rate, the company may still look to transition to RISC-V in the long term because the ISA's royalty-free status would allow the Snapdragon giant to lower its costs.

"Qualcomm makes a lot of money, but their margins aren't that huge. And so if Arm starts cutting into their margins, what does that do to the Qualcomm stock price?" he said.

To Newman, the possibility that Arm's actions could scare licensees away is bad timing, considering the fact its owner, Japan-based SoftBank, plans to return the company back to the public market this year.

"If I was trying to IPO the company or if I was SoftBank, I'd be like, 'how much upside is there in this Nuvia deal versus downside if Qualcomm decides to take their efforts elsewhere?'" he said.

Could Arm and Qualcomm settle?

In her order last month, US District Judge Noreika said neither Arm or Qualcomm have been able to resolve this dispute by settlement, mediation, or arbitration.

However, analyst Prakash Sangam said he believes the two companies could still eventually settle because of the potential consequences of the lawsuit.

What could help push Arm and Qualcomm to reach a settlement is the fact that the latter is asking for a trial by jury, according to Sangam. A jury trial is a potential issue for both companies because the case's complexity creates uncertainty about how it will be viewed by a judicial body made of everyday people.

"So it all boils down to who can crystallize their arguments in easy-to-understand, simple language," Sangam, principal of Tantra Analyst, told The Register. "And from a jury point of view, they are two big companies fighting. Of course, they will look seriously into it. But it all boils down to how easily they understand this case, and who they see as the victim and who is the aggressor."

The two companies may even try to settle earlier if new evidence that emerges during the lawsuit's discovery process, which begins January 13, convinces one side that its case is weak, Sangam said.

But when it comes down to who may benefit more from a settlement, Sangam thinks it will be Qualcomm and not Arm because the latter can afford to let the legal process play out, which could include potential appeals beyond 2024. He also thinks it's unlikely for Arm to win an injunction that would stop Qualcomm from developing the custom Nuvia cores as the case plays out in court.

"There's nothing stopping Qualcomm from doing what they are planning to do while the case drags on, Whereas for Arm, if they are to do an IPO, and if you're an investor in the IPO, you will be worried about how the case will turn out," he said. ®

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