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
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  • pluto7777 - Friday, June 28, 2013 - link

    Exactly what is this IP they sell? Is it for hardware or software because Mali is a giant black box. Intel came to realize they could do more good for the end users by embracing open source. It's a shame this idea completely escapes ARM. Reply
  • ShieTar - Friday, June 28, 2013 - link

    ARMs main IP is the processor design. Intel has absolutely no plans to make their Haswell-Designs open source. They also still sell their compiler and high performance libraries, so I really don't see how they are "embracing open source". Care to clarify your statement? Reply
  • Spunjji - Friday, June 28, 2013 - link

    I'm fairly sure they're talking complete nonsense. Reply
  • name99 - Friday, June 28, 2013 - link

    And it's not even Haswell's design. Intel produces a ton of software (like ICC and their math libs) which aren't open source... Reply
  • pluto7777 - Friday, June 28, 2013 - link

    True, but it's evident Intel is at least trying. Even AMD has made some positive steps. Do yourselves a favor and look into Lima. ARM apparently doesn't like people reverse engineering their stuff. Reply
  • pluto7777 - Friday, June 28, 2013 - link

    Intel has open source drivers on Linux. They actually employee people to work on this instead of other companies who only have closed source drivers and force other people to backwards engineer everything if they want an open driver. Reply
  • iwod - Friday, June 28, 2013 - link

    Seeing both IMG ( MIPS ) and ARM are IP liscensing company, do both company's business mode work similary?

    And When will Anantech do a piece on the newly annoucned MIPS v5 "Warrior".
    Reply
  • pluto7777 - Friday, June 28, 2013 - link

    That's another true loss. I can't Imagine how anyone could want anything from Imagination Technologies. I hope they only get Microsoft support and don't try to leech off the open source community through some loophole like Android does. Reply
  • munsie - Friday, June 28, 2013 - link

    I assume you mean the MIPS processor, not their GPUs? Because Apple has been shipping Imagination Tech GPUs since the first iPhone and Intel used them originally for their integrated graphics. Reply
  • ShieTar - Friday, June 28, 2013 - link

    "In the PC industry, the concept of a fabless semiconductor isn’t unusual."

    And most chemistry labs also work with fabless semiconductors. I think this sentence is missing a word ;-)
    Reply

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