ARM Case Study - Market Size

ARM was established in November 1990 as Advanced RISC Machines Ltd, a joint venture based in Cambridge, UK. Acorn Computer Group provided the technology and founding engineers whilst Apple Computers and VLSI Technology supplied funding. Under the new CEO (Robin Saxby, a veteran semiconductor industry executive), the company adopted what has since been dubbed the “ARM business model”.

ARM is not the only computer chip company that does not manufacture its own products. Most small semiconductor companies rely on bigger partners or contract manufacturers for production. But to keep its costs down, ARM goes a step further: rather than selling chips, it simply sells licenses to use its intellectual property. Revenues come from up-front licence fees, royalties, and support and service fees. ARM is therefore what Saxby calls a “chipless chip company.”

The downside of this business model is that because development is expensive, there must be many customers for it to be economically viable. ARM’s timing was good: the low power requirements of its designs compared to competitors made it the system of choice in the mobile electronics industry, which was then beginning to grow rapidly. Today ARM licensees include many of the major players in the chip industry, including Intel, IBM, Texas Instruments, and Sharp.

Leaving the manufacture of chips to the customer made expansion of the company simpler than it may have otherwise been. Today ARM is a global corporation, employing more than 720 people in facilities in nine countries. It has design centres in Blackburn, Cambridge and Sheffield (UK), Sophia Antipolis (France), Walnut Creek (California, USA), and Austin (Texas, USA). ARM also maintains sales, administrative and support offices in China, France, Germany, Japan, Korea, Taiwan, Israel, UK and USA. In April 1998, ARM listed on the London Stock Exchange and NASDAQ.

Lessons on Size

• ARM leveraged the benefits of a licensing business model: the costs of arranging chip manufacture could be left to the customer. This model risked low revenue in the case of low uptake, but allowed the company to expand globally quickly.
• The comparatively low power usage of ARM’s products made them ideal for an emerging market with huge growth potential: mobile electronics. ARM also differentiated itself from competitors by creating the first low cost RISC (reduced instruction set computer) architecture. Competing architectures, which were more commonly focused on maximising performance, were targeted towards high end workstations.
• Because ARM’s products were integrated into the mobile electronics industry as it was taking off, they became an industry standard.

Related Lessons

• The ARM business model is not a one-size fits all model at all, but rather demonstrates the importance of tailoring your business model and planning your route to market carefully.