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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  • Krysto - Friday, June 28, 2013 - link

    "It must frustrate ARM just how much attention is given to Intel in the ultra mobile space, especially considering the chip giant’s effectively non-existent market share"

    Well, it helps to have people like you Anand, who make baseless statements such as "Haswell will take over tablets and beat ARM", a whole year before you even know the details about the Haswell architecture or review it.

    Maybe if the media didn't fall for Intel's misleading marketing and press releases so easily, Intel wouldn't get as much attention with nothing to show for it.
    Reply
  • cnxsoft - Friday, June 28, 2013 - link

    Interesting no growth at all forecast for the "Desktop PC and Servers" up to 2017. What about ARMv8 based servers? Or is it in another category (Networking?).

    I also thought ARM had a bigger market share in micro-controllers, but 8-bit and 16-bit designs still have a significant market share, so I guess that's partly why.
    Reply
  • bill5 - Friday, June 28, 2013 - link

    Anand might find it interesting that according to a forbes article, ARM was one of the two finalists for Sony/MS next gen consoles...

    They supposedly had a performance "bake off", and decided on the Jaguars. With the caveat that although ARM would not be ready with enough performance in time for PS4/XB1, they would be soon after. So, evidently they just missed.
    Reply
  • bill5 - Friday, June 28, 2013 - link

    linkkkkk http://www.forbes.com/sites/patrickmoorhead/2013/0... Reply
  • A5 - Friday, June 28, 2013 - link

    I believe it. I'm thinking A57 will match or beat Jaguar performance, but it wasn't going to be ready for a Q4 2013 mass production launch. Considering that the home console environment is particularly power-constrained, there was probably no reason to wait for ARM to be ready. Reply
  • A5 - Friday, June 28, 2013 - link

    *is not, damnit Reply
  • maybeimwrong - Friday, June 28, 2013 - link

    I've been a fan of AT since the 90s, and will undoubtedly continue to be; there's no better tech site out there. That said, I'm uncomfortable with these "Featured Reviews." Perhaps I'm making unwarranted assumptions, but I can't help but read that phrase as "this article was commissioned by a third party, and may remain at the top of the main page for longer than it would have in the absence of payment." I'm not interested in what advertisers think should be featured; I want to see what Anand thinks should be featured. I understand that advertising pays the bills, but there will be far fewer advertisers if readers stop believing in the integrity of the site. While I'm sure this reads as an overreaction, allowing money to dictate editorial content is a slippery slope. Anand, please be careful with these advertising programs. Reply
  • Ryan Smith - Friday, June 28, 2013 - link

    In this case I can assure you that you're reading into "featured review" a little too much. Anand likes to use that label for his major industry articles; this article wasn't commissioned by anyone.

    It also won't remain at the top of the page any longer than any other article. All of our articles are bumped down sequentially based on date of publication.
    Reply
  • maybeimwrong - Friday, June 28, 2013 - link

    Thanks for the clarification, Ryan. I was paranoid because some of the language in the advertising section seems to allow for the kind of scenario I described. I know articles are bumped down in order of publication, but that doesn't mean the timing can't be adjusted to feature some articles more than others. Keep up the good work :) Reply
  • THF - Monday, July 01, 2013 - link

    Well, how is he able to publish the "please do not publish without approval" presentation slides then? Some degree of ARM approval must have been involved in this article. Reply

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