How ARM Makes Money

AMD, Intel and NVIDIA all make money by ultimately selling someone a chip. ARM’s revenue comes entirely from IP licensing. It’s up to ARM’s licensees/partners/customers to actually build and sell the chip. ARM’s revenue structure is understandably very different than what we’re used to.

There are two amounts that all ARM licensees have to pay: an upfront license fee, and a royalty. There are a bunch of other adders with things like support, but for the purposes of our discussions we’ll focus on these big two.

Everyone pays an upfront license fee and everyone pays a royalty. The amount of these two is what varies depending on the type of license.

The upfront license fee depends on the complexity of the design you’re licensing. An older ARM11 will have a lower up front fee than a Cortex A57. The upfront fee generally ranges from $1M - $10M, although there are options lower or higher than that (I’ll get to that shortly).

The royalty is on a per chip basis. Every chip that contains ARM IP has a royalty associated with it. The royalty is typically 1 - 2% of the selling price of the chip. For chips that are sold externally that’s an easy figure to calculate, but if a company is building and selling a chip internally the royalty is based on what the market price would be for that chip.

Both the up front license fee and the royalty are negotiable. There are discounts for multiple ARM cores used in a single design. This is where things like support contracts come into play.

Buses/interfaces come for free, you really just pay for CPU/GPU licenses. ARM’s Mali GPU is typically going to be viewed as an adder and is currently viewed as demanding less of a royalty than ARM’s high-end CPU licenses. A rough breakdown is below:

ARM Example Royalties
IP Royalty (% of chip cost)
ARM7/9/11 1.0% - 1.5%
ARM Cortex A-series 1.5% - 2.0%
ARMv8 Based Cortex A-series 2.0% and above
Mali GPU 0.75% - 1.25% adder
Physical IP Package (POP) 0.5% adder

In cases of a POP license, the royalty is actually paid by the foundry and not the customer. The royalty is calculated per wafer and it works out to roughly a 0.5% adder per chip sold.

It usually takes around 6 months to negotiate a contract with an ARM licensee. From license acquisition to first revenue shipments can often take around 3 - 4 years. Designs can then ship for up to 20 years depending on the market segment.

Of the 320 companies that license IP from ARM, over half are currently paying a royalty - the rest are currently in period between signing a license and shipping a product. ARM signs roughly 30 - 40 new licensees per year.

About 80% of the companies that sign a license end up building a chip that they can sell in the market. The remaining 20% either get acquired or fail for other reasons. Royalties make up roughly 50% of ARM’s total revenues, licensing fees are just over 33% and the remainder is equally distributed between software tools and technical support.

ARM's revenues are decent (and growing), but it's still a relatively small company. In 2012 ARM brought in $913.1M. Given how many ARM designs exist in the market (and the size of some of ARM's biggest customers), it almost seems like ARM should be raising its royalty rates a bit. Because of ARM's unique business model, gross margin can be north of 94%. Operating margin tends to be around 45% though.

How ARM Works Types of License & The Chosen Three
POST A COMMENT

64 Comments

View All Comments

  • Spunjji - Friday, June 28, 2013 - link

    I think you'll find that for the vast majority of users it probably is. I know that I am a distinct minority in spending more than ~£120 on a monitor for a desktop PC, and notebooks are now the dominant segment in PC sales where the cost of the display is going to be reduced compared to a desktop unit. Reply
  • name99 - Friday, June 28, 2013 - link

    Look at an MBA. That's a far more representative type machine than a multi-screen desktop. That's what, $1200 or so, of which, what, $3..400 or so is Intel.
    No-one else is close. The display is, what, maybe $100 at the most. The storage is maybe $200 at the most (being charitable in both cases).

    Lower end laptops which are still using Intel are cheaper and so the fraction is even higher.
    Reply
  • madmilk - Friday, June 28, 2013 - link

    In the PC world, the usual display is a $70 (eBay panel pricing, which is definitely an overestimate of BOM costs) 1366x768 display, or maybe a $140 1920x1080 display for nicer laptops and desktops. Even the rMBP 15 panel is only $300. In comparison, Core i5 processors start at over $200, and are very common in anything mid-range or above. Reply
  • lukarak - Friday, June 28, 2013 - link

    All of the iOS devices are Arm based as well. Apple just designs their own processors based on the ARM instruction set, like Qualcomm with Scorpion and Krait, and unlike Samsung, NVIDIA or TI.
    Also, all WP are also ARM based.
    Reply
  • aryonoco - Friday, June 28, 2013 - link

    I know it's OT, but since others have mentioned, I thought I'd add my voice as well: I miss the podcast. I REALLY miss the podcast :-) Reply
  • Deepak Chamarthi - Friday, June 28, 2013 - link

    Nice info , Thanks Anand. Indeed ARM like companies needs this type of dynamic model. Mobiles everywhere -:) Reply
  • dishayu - Friday, June 28, 2013 - link

    So, who would the chosen 3 be? I can guess Qualcomm and Samsung. Which one's the 3rd? Apple? TI? nVidia? Reply
  • PEPCK - Friday, June 28, 2013 - link

    Wouldn't be Qualcomm or Apple, as they only use the ARM architecture, preferring to build their own designs. TI is a partner for the A15, but is unlikely to be for future chips, due to their retreat from the high performance SoC business. Reply
  • dishayu - Friday, June 28, 2013 - link

    Hmm... But then same logic should apply to Samsung and their Exynos chips as well. Reply
  • Ryan Smith - Friday, June 28, 2013 - link

    Exynos uses standard ARM core designs though. Whereas Snapdragon and A6 (and beyond) are using custom core designs. There's a big difference between a custom chip using standard cores, and a chip using custom cores. Reply

Log in

Don't have an account? Sign up now