Season 4, Episode 2 ARM & SoftBank

Summary Notes


In this episode of Acquired, hosts Ben Gilbert and David Rosenthal, along with guest Simon Segars, delve into the fascinating story of ARM Holdings, a British semiconductor and software design company that has become ubiquitous in mobile and embedded technology. They discuss SoftBank's staggering $32 billion acquisition of ARM and the strategic importance of ARM's energy-efficient processor designs which are found in a vast array of devices, from phones to appliances. The episode also touches on ARM's unique business model, which involves licensing its chip designs and collecting royalties on each chip sold, contributing to its widespread adoption and financial success. They highlight ARM's role in the evolution from PCs to mobile computing and speculate on its potential growth areas like AI and autonomous vehicles, emphasizing the company's significant but often underappreciated impact on the tech landscape.

Summary Notes

Introduction to Acquired Podcast and the Episode Theme

  • Hosts Ben Gilbert and David Rosenthal introduce the topic of SoftBank's purchase of ARM Holdings.
  • They discuss the significance of ARM Holdings as a central component in smartphones.
  • The acquisition by SoftBank is part of its larger disruption in the startup landscape with its $100 billion fund.
  • The episode connects to the previous discussion on ambient computing and its relevance to ARM technology.

"Welcome to season for episode two of Acquired, the podcast about technology acquisitions and ipos. I'm Ben Gilbert." "I'm David Rosenthal, and we are your hosts."

This quote introduces the hosts and the podcast, setting the stage for the discussion on ARM Holdings and its acquisition by SoftBank.

"Today we are going to explore a topic that has flown relatively under the radar despite being the primary component of every single one of our phones. SoftBank's $32 billion purchase of the british based Arm holdings."

Ben Gilbert highlights the episode's focus on ARM Holdings, an important yet under-discussed component in modern technology, specifically its acquisition by SoftBank.

ARM Holdings' Historical Significance

  • The ARM 610 processor, developed with Apple for the Apple Newton, is the core of all ARM processors.
  • ARM's technology is foundational to the processors used in modern devices.

"Because, I mean, what's cool is like, it is literally the Arm 610 that was developed with Apple for the Apple Newton is the core of all the ARm processors."

David Rosenthal emphasizes the historical importance of the ARM 610 processor and its legacy in current ARM processors.

SoftBank's Background and Acquisition of ARM Holdings

  • SoftBank transitioned from a Japanese telecom to a multinational conglomerate.
  • The company created a near $100 billion fund, causing major changes in the startup ecosystem.
  • ARM Holdings' acquisition is a key part of SoftBank's strategy.

"For folks that listened to the previous episode that we did on SoftBank, you know, they were once a japanese telecom and multinational conglomerate. Now that has a close to 100 billion dollar fund that they have created massive disruption in the startup landscape."

Ben Gilbert provides context on SoftBank's evolution and its influential role in the technology and startup sectors through its massive investment fund.

Acquired Limited Partner Program

  • The hosts discuss the Acquired Limited Partner program for in-depth exploration of technology startups and venture capital.
  • They express excitement about the relevance of their last episode's investment thesis on ambient computing.
  • Listeners are encouraged to support the show and become limited partners.

"Listeners, you know that a few months ago we started our limited partner program for folks to go deeper on technology startups and vc topics with us."

Ben Gilbert discusses the Acquired Limited Partner program, which offers listeners a deeper dive into topics related to technology startups and venture capital.

Pilot as a Sponsor

  • Pilot is a company that provides accounting, tax, and bookkeeping services for startups and growth companies.
  • It is now the largest startup-focused accounting firm in the US.
  • Pilot's services are integral for companies to focus on their core product and customer needs.

"Our next sponsor for this episode is one of our favorite companies and longtime acquired partner pilot for startups and growth companies of all kinds. Pilot is the one team for all of your company's accounting, tax and bookkeeping needs."

The speaker introduces Pilot as a sponsor, noting its comprehensive financial services for startups and growth companies.

Importance of Outsourcing Non-Core Activities

  • Jeff Bezos' axiom suggests startups should focus on their unique product and outsource other tasks.
  • Accounting is a prime example of a necessary service with no direct impact on a company's product or customers.
  • Outsourcing accounting allows companies to concentrate on innovation and growth.

"And speaking of Bezos, we talk all the time on acquired of Jeff's AWS inspired axiom that startups should focus on what makes their beer taste better. In other words, only spend your limited time and resources on what's actually going to move the needle for your product and customers, and outsource everything else that you do as a company that doesn't fit that bill."

The speaker explains Jeff Bezos' philosophy on startups focusing on their core competencies and outsourcing other operations like accounting to specialized firms like Pilot.

Pilot's Comprehensive Financial Services

  • Pilot manages a company's entire financial stack, from general ledger to CFO services.
  • The firm has a history of working with a wide range of startups, including those in Silicon Valley.
  • Pilot's services scale with companies as they grow.

"Pilot both sets up and operates your company's entire financial stack. So finance, accounting, tax, even CFO services like investor reporting from your general ledger all the way up to budgeting and financial sections of board decks."

David Rosenthal details the extensive financial services provided by Pilot, emphasizing its role in setting up and operating a company's financial operations.

Acquired's Milestone and Virtual Meetup Announcement

  • Acquired celebrates a milestone of a million downloads.
  • A worldwide virtual meetup is announced for interaction with the hosts and the community.
  • The meetup will include an AMA session and is scheduled for February 21, 2019.

"Indeed, one more thing. We passed a million downloads in the lifetime of acquired woo. Huge milestone. And to celebrate, we are going to do, you heard it here first, a worldwide virtual acquired meetup."

David Rosenthal announces a virtual meetup to celebrate the podcast's milestone, providing an opportunity for fans to engage with the hosts and community.

ARM Holdings' Origin and Impact on Computing

  • Acorn Computers, based in Cambridge, England, is responsible for creating ARM's precursor.
  • The BBC Micro, developed by Acorn, was a significant computer in British education.
  • Acorn's need to compete with IBM led to the development of a new processor architecture.

"So they start a project, they call it the Archimedes project. This must be like a legacy of Cambridge and academia and having these scientists and mathematician names."

David Rosenthal narrates the history of Acorn Computers and the inception of the Archimedes project, which would eventually lead to the development of ARM's technology.

The Evolution of Processor Architecture

  • Acorn's decision to create their own microprocessor was pivotal in the face of Intel's rejection.
  • The team, led by Sophie Wilson, focused on building a high-performance yet low-cost processor.
  • The concept of a reduced instruction set computer (RISC) was explored, leading to a more efficient architecture.

"Let's try it again. They give the task to a team of engineers on staff, and they say, okay, we need something super high power that can essentially compete with Intel's 286 chip."

David Rosenthal explains Acorn's motivation to develop their own microprocessor, setting the stage for the revolutionary ARM architecture.

Reduced Instruction Set Computer (RISC) vs. Complex Instruction Set Computer (CISC)

  • RISC architecture focuses on simplicity and efficiency, with fewer instructions executed faster.
  • Acorn's RISC processor had significantly fewer transistors than Intel's CISC processors.
  • The RISC approach allowed for lower costs and power consumption, leading to its widespread adoption.

"You could think of it as it's the 80 20 rule, right? Like these risk reduced infrastructure set architecture machines or processors that acorn designed, they only could do about 80% of the instructions that CISC could do, but they did those instructions, they executed them much, much faster."

David Rosenthal discusses the principles behind RISC architecture, emphasizing its efficiency and the balance between capability and performance.

Engineering and Computer Science Breakthrough

  • The 80/20 rule in processor design led to a cheaper and better-performing chip.
  • The chip, named "Acorn," was a significant advancement in reduced instruction set computer (RISC) architecture, later known as ARM (Acorn RISC Machine).
  • This innovation was expected to change the industry, but the immediate impact was not as significant as anticipated.

s 80 20 rule, it actually has better performance than the 22 86. So it's, like, way cheaper to make, and it has actually better performance for most applications. This is, like, huge. This is a huge leap forward in engineering and computer science.

The quote highlights the significance of the 80/20 rule in processor design, which led to the creation of a more cost-effective and higher-performing chip, marking a substantial leap in the fields of engineering and computer science.

Market Forces and Compatibility Issues

  • The first ARM chip did not outperform IBM PC and clones due to market forces.
  • Microsoft's DOS, and later Windows, ran on Intel x86 architecture, which dominated the market.
  • Despite RISC-based architecture's technological superiority, the Microsoft-Intel duopoly maintained industry dominance.
  • Compatibility issues with DOS prevented ARM's widespread adoption during the initial PC wave.

Well, this is like a market forces thing. So by the time it launched, Microsoft was on the scene, right? And DOS was around and DOS ran on Intel X 86 architecture. And then eventually Windows would run on top of DOS and started getting so much market share.

David Rosenthal explains that market forces, particularly the dominance of Microsoft's DOS on Intel's x86 architecture, hindered the adoption of ARM's superior technology during the initial PC wave.

Compiler and Architecture Challenges

  • Compilers play a critical role in bridging programming languages and chipsets.
  • It was challenging to make C language and standard C compilers work across different architectures due to assumptions baked into the language, compiler, and chip.
  • ARM's innovative instruction set architecture was not widely adopted initially because few applications could run on it.

It's important to understand what role a compiler plays in all this. So why is it that they couldn't just run windows, run DOS on these better chips until recently?

Ben Gilbert emphasizes the importance of compilers in making software work across different chip architectures and explains the difficulty in adapting software to run on ARM's innovative chips.

Acorn's Acquisition and ARM Processor's Unexpected Benefit

  • Acorn was in a bleak position after investing heavily in the Archimedes project, which failed to compete with IBM PCs.
  • Acorn was acquired by Italian computer company Olivetti and exited the PC business.
  • ARM processors, designed for performance and cost-efficiency, demonstrated an unexpected benefit of low power consumption.

But there was something also that we haven't talked about yet that was pretty interesting about these arm processors that they were building.

David Rosenthal introduces the unexpected benefit of ARM processors' low power consumption, which was discovered when the processors functioned without a dedicated power supply.

Vision for Mobile Computing and ARM's Role

  • Herman Hauser, Acorn co-founder, envisioned the future of mobile computing and started the Active Book Company to focus on PDAs.
  • ARM processors' low power consumption made them ideal for mobile devices, leading to a collaboration with VLSI for chip production.
  • Apple, also interested in PDAs, needed a low-power, high-performance chip for the Newton project.

And he's thinking, which a couple people are thinking in technology at the know, pcs are here, but what's the next wave going to be?

David Rosenthal discusses Herman Hauser's foresight in predicting the next technological wave, which he believed would be mobile computing, prompting his interest in PDAs and ARM processors.

Apple's Involvement and the Founding of ARM Ltd

  • Apple invested in the new company ARM Ltd as part of a joint venture for the Newton project.
  • The deal between Apple, Acorn, Olivetti, and VLSI led to the creation of ARM Ltd, with Apple obtaining a significant equity stake.
  • ARM and Apple closely collaborated to customize the ARM 610 processor for the Newton.

This blew my freaking mind. That arm was started as a JV with Apple on the Newton.

Ben Gilbert expresses astonishment upon learning that ARM Ltd was founded as a joint venture with Apple, highlighting the crucial role Apple played in ARM's history.

ARM's Business Model and Technological Impact

  • ARM's CEO, Robin Saxby, developed a business model that combined technology licensing and unit sales royalties.
  • The model involved upfront licensing fees, payment for engineering collaboration, and royalties on devices shipped with ARM technology.
  • This approach fostered the development of system-on-a-chip designs, revolutionizing mobile computing.

So what did Robin do? He was like, okay, well, we need to work with other partners here. We can't be dependent on just Apple and just Newton to buy a lot of chips from us because they're not going to pay us a lot in licensing fees here.

David Rosenthal explains how Robin Saxby's strategic decision to diversify ARM's partnerships and establish a new business model led to the company's growth and influence in the tech industry.

The Proliferation of ARM Chips

  • ARM chips have been shipped in over 130 billion devices worldwide.
  • The ubiquity of ARM technology is attributed to the company's innovative business model and technological advancements.
  • ARM's success story is a testament to the powerful combination of technology and business model innovation.

Do you know how many arm chips have shipped to date? 130,000,000,000.

Ben Gilbert and David Rosenthal discuss the staggering number of ARM chips that have been shipped, illustrating the massive scale and success of ARM's technology in the global market.

Evolution of Cell Phones and ARM's Role

  • The Nokia candy bar phone was a significant consumer GSM phone, marking the start of a sharp increase in cell phone shipments leading to smartphones.
  • ARM processors enabled cell phones to run more complex applications, such as games like Snake, which was a turning point in mobile technology.
  • The transition from embedded device-like phones to smartphone PCs required adapting operating systems for ARM chipsets, which had different power requirements and instruction sets.

"This is the first major consumer GSM phone that is sold, certainly in America and all over the world. And this is what starts the kink in the curve of cell phone shipments that ends up with smartphones and where we are today."

The quote highlights the significance of the GSM phone in the evolution of cell phone technology and its impact on the market.

"Snake was like the killer app because arm processors were literally like before the Nokia 61 ten, the processors in cell phones weren't good enough to even run snake."

The quote emphasizes the importance of ARM processors in enabling more complex applications on cell phones, with Snake being a notable example.

The Challenge of Penetrating the Microsoft-Intel Duopoly

  • ARM chips, despite their advantages, struggled to penetrate the Microsoft-Intel duopoly due to the incompatibility of software between ARM-powered devices and Windows/Mac operating systems.
  • Microsoft missed the mobile revolution possibly due to being tied to complex instruction set architectures, while Apple, with its history of architecture transitions, was more adaptable.

"David was talking earlier about why these arm chips were, even though they were better in a lot of ways, they couldn't penetrate the duopoly of Microsoft and Intel and Windows running there."

The quote discusses the difficulty ARM chips faced in breaking into the market dominated by Microsoft and Intel.

"That wasn't Microsoft Windows because Microsoft Windows and DOS only ran on complex instruction set architectures, right?"

The quote explains the technical reasons behind Microsoft's struggle to adapt to the mobile market, as their operating systems were designed for a different type of architecture.

Apple's Flexibility and Innovation

  • Apple's history of transitioning between different processor architectures, such as from Motorola processors to Intel, positioned it well to adapt macOS for mobile devices.
  • The company's ability to rearchitect its operating systems for different chipsets was a key factor in its success in the mobile market.
  • Apple's transition to Intel chips was a strategic move that laid the groundwork for future adaptations, including the development of iOS.

"Apple had always been much more open about their architectures that macOS ran on, that Os ten ran on, right?"

The quote points out Apple's openness to changing processor architectures, which played a role in its ability to enter the mobile market.

"So we're changing the chips that are in all the new macs away from the power pc that we've been using to using intel, which of course was so dramatized."

The quote refers to Apple's strategic shift to Intel chips, which was a significant move in the company's history and indicative of its adaptability.

ARM's Financial Impact on Apple

  • ARM's IPO and subsequent revenue were critical in preventing Apple from going bankrupt in the late 1990s.
  • Apple's decision to slowly liquidate its ARM shares resulted in significant profits that helped keep the company afloat during a difficult financial period.

"This saves Apple the arm IPO. Had it not happened, very likely Apple would have gone bankrupt because this is 1998."

The quote underscores the importance of ARM's IPO in saving Apple from potential bankruptcy.

"Apple, remember, they invested one and a half million. They make $792,000,000 in profit from selling their arm stock over the next couple of years."

The quote details the financial benefit Apple gained from its investment in ARM, highlighting the magnitude of the profit made from selling ARM stock.

ARM's Pervasive Technology

  • ARM chips are not limited to cell phones; they are used in a wide range of devices requiring low power, high-performance embedded processors.
  • The company's partners were shipping over 5 billion devices annually by 2010, including in cars, appliances, and various sensors.

"So almost as many people as there are on the planet, arms partners are shipping devices."

The quote emphasizes the vast number of devices powered by ARM chips, reflecting the company's widespread influence in technology.

ARM's Business Model and Licensing

  • ARM's business model is unique in that it does not manufacture chips but licenses its chip designs and instruction set architecture, earning a cut from every chip manufactured using its IP.
  • The company's ability to create value and lock in through its ecosystem has allowed it to maintain a significant position in the industry.

"They just license their instruction set and it means they get a cut of all chips that are manufactured using their ip."

The quote explains ARM's business model of licensing its intellectual property and how it profits from the vast production of ARM-based chips.

SoftBank's Acquisition of ARM

  • SoftBank's acquisition of ARM for $32 billion in 2016 was a strategic move, highlighting ARM's importance and potential in the technology landscape.
  • The acquisition process was swift and decisive, reflecting the value SoftBank saw in ARM's technology and business model.

"I want to buy you guys, and I'm going to offer you $32 billion, which was almost a 50% premium to where they were trading at that moment in time, and I want to do it now."

The quote captures the moment SoftBank proposed to acquire ARM, indicating the premium offered and the urgency behind the deal.

Vision Fund's Investment Strategy and ARM's Growth

  • Vision Fund has a 12-year fund lifetime, necessitating eventual action on ARM holdings.
  • ARM's headcount grew by over 50% since the SoftBank acquisition, despite being net income negative.
  • ARM's operating margin dropped from 52% to 24% with only a slight increase in revenue.
  • The company is investing in growth areas like AI and autonomous vehicles, indicating a shift from a focus on IoT to AI and connected cars.
  • ARM's growth in devices shipped continues to be strong, with a shift from 15 billion devices to over 21 billion in two years.

"the Vision fund has a twelve year fund lifetime, so it's not like he can hold it indefinitely."

This quote indicates the time-sensitive nature of Vision Fund's investment in ARM, highlighting the need for strategic decisions on the investment's future.

"arm has hired over 2000 people. So they've grown by more than 50% headcount since."

This quote demonstrates ARM's significant growth in workforce post-acquisition, suggesting investment in expansion despite financial losses.

"Their EBITDA dropped 40% despite the revenue increase."

This quote highlights the financial challenges ARM faces, with revenue growth not translating into profit, indicating issues with cost management or investment strategy.

"Arm has started now making designs and devices, chips that are dedicated for AI use cases, but also for autonomous vehicle use cases."

This quote shows ARM's strategic pivot towards next-generation computing technologies, positioning itself in the growing markets of AI and autonomous vehicles.

Acquisition Conditions and Market Dynamics

  • SoftBank acquired ARM during a currency fluctuation due to Brexit, taking advantage of the lower pound value.
  • The acquisition was financed through the sale of Alibaba and Supercell shares and a significant loan.
  • ARM's position as a neutral, deep-pocketed entity allowed it to avoid value-destructive sales to competitors like Apple or Qualcomm.
  • ARM's acquisition and subsequent investments are considered value-creating for the technology ecosystem.

"So it was interesting. The time when he bought it was actually at a currency fluctuation due to Brexit, where the pound was not doing well."

This quote explains the timing and financial advantage SoftBank had during the ARM acquisition, capitalizing on Brexit's impact on currency values.

"if you sold to Apple, then Qualcomm's freaking out that they're not going to have access to their core technology anymore."

This quote emphasizes the strategic advantage of SoftBank's neutral position, enabling ARM to grow without alienating key players in the tech industry.

Investment Thesis and Future of Computing

  • The investment in ARM is based on the belief that the market for IoT and connected devices will expand significantly.
  • ARM's shift in focus from IoT to AI and connected cars reflects changing market trends and growth opportunities.
  • The future of computing may include ambient computing with numerous ARM chips in everyday devices.
  • ARM's financial performance and the value of its technology in a rapidly evolving market are key to evaluating the investment's success.

"It's Iot that the Internet of Things is blowing up and know there's going to be an arm device and much more than your phone, it's going to be in all these other things that are communicating with the Internet around you."

This quote captures the initial investment thesis that IoT's growth would drive ARM's expansion beyond smartphones, creating a larger market for its technologies.

"what arm was to mobile and intel was to the desktop, is there going to be something else to the proliferation of devices and make arms sort of look like the old grandpa technology?"

This quote poses a critical question about ARM's ability to maintain its technological edge in the face of potential new, low-power computing technologies that could disrupt the market.

ARM's Impact and Value Creation

  • ARM's funding for its team of experts is expected to continue producing innovative IP that drives technological advancements.
  • The acquisition by SoftBank allowed ARM to invest aggressively in growth without the constraints of public market expectations.
  • ARM's strategic investments and the potential proliferation of its chips in ambient computing devices could validate SoftBank's acquisition as value-creating.

"if you believe that those 4000 really brilliant physicists and phds and chip designers and computer scientists and technologists, if you believe that funding them, they'll continue to produce IP that will enable us to have continued innovation."

This quote suggests that investing in ARM's talented workforce will result in continued innovation and value creation within the technology ecosystem.

"It's very hard to ask. Once you have a certain set of investors, it's very hard to ask them something different from what you have been asking them without a change of control like this."

This quote underscores the significance of SoftBank's acquisition in enabling ARM to pursue a growth strategy that may not have been possible under public market pressures.

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