Season 4, Episode 2: ARM & SoftBank

In this episode of Acquired, hosts Ben Gilbert and David Rosenthal delve into SoftBank's $32 billion acquisition of ARM Holdings, a pivotal player in the technology landscape whose processors power nearly all smartphones and numerous other devices. The discussion highlights ARM's innovative reduced instruction set computing (RISC) architecture, which offers high performance with low power consumption, making it ideal for mobile and embedded systems. They also explore ARM's strategic business model of licensing its technology and partnering closely with clients. The acquisition by SoftBank, driven by Masa Son's vision of an interconnected future and significant investments in AI and autonomous vehicles, underscores ARM's critical role in the evolving tech ecosystem.

• ARM processors' origin dates back to the development of the Arm 610 for the Apple Newton.
• ARM Holdings, a British company, was acquired by SoftBank for $32 billion.
• ARM processors are crucial components in modern smartphones and many other 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."

• ARM processors have a significant historical and technical legacy.

• The podcast focuses on technology acquisitions and IPOs.
• Season 4, Episode 2 discusses SoftBank’s acquisition of ARM Holdings.
• The podcast aims to delve into technology startups and venture capital topics.

"Welcome to season four, episode two of Acquired, the podcast about technology acquisitions and IPOs."

• Establishes the podcast's focus on significant business and technology transactions.

• SoftBank started as a Japanese telecom company and evolved into a multinational conglomerate.
• SoftBank's $100 billion fund has significantly impacted the startup landscape.
• The acquisition of ARM Holdings is a pivotal deal in SoftBank’s strategy.

"Now that has a close to hundred billion dollar fund that they. They have created massive disruption in the startup landscape."

• Highlights SoftBank's transition and its role in the technology and startup ecosystem.

• Acorn Computers, based in Cambridge, won a contract to supply computers for the BBC’s Computer Literacy Project.
• The BBC Micro was a significant educational tool in the UK, selling over 1.5 million units.
• Acorn's success with the BBC Micro led them to pursue more powerful computing solutions.

"They end up awarding the contract to a little company in Cambridge called Acorn Computers."

• Acorn Computers played a crucial role in early computer education in the UK.

• In 1981, IBM introduced the IBM PC, marking a significant shift in personal computing.
• The IBM PC targeted business and professional users, expanding the market for personal computers.
• Acorn recognized the need to compete with IBM and began the Archimedes project.

"IBM introduced their first IBM PC in the American market."

• IBM's entry into the personal computer market was a pivotal moment in computing history.

• Acorn initially used the 6502 processor but needed something more powerful for the Archimedes project.
• Intel's refusal to supply their 286 processor led Acorn to develop their own processor.
• Sophie Wilson led the team that created the first ARM processor, using a reduced instruction set computer (RISC) architecture.

"They decide, you know what? Maybe we can just build our own microprocessor."

• Acorn's development of the ARM processor was a response to market needs and technical challenges.

• RISC architecture simplifies the instructions that a processor can execute, making it more efficient.
• RISC processors focus on executing a smaller number of instructions very quickly.
• This approach contrasts with the complex instruction set computer (CISC) architecture used by Intel.

"This team, led by Sophie Wilson... implements one of the most important contributions to all of computing."

• RISC architecture is a fundamental innovation that underpins the efficiency of ARM processors.

• ARM Holdings does not manufacture chips but licenses its designs to other companies.
• The ARM architecture is widely used in mobile devices, embedded systems, and increasingly in servers and desktops.
• The acquisition by SoftBank highlights the strategic importance of ARM in the global technology landscape.

"This chip company manufactures a total of zero chips, and in many cases, they don't even design them either."

• ARM's business model and technological influence are unique and far-reaching.

• The episode covers the historical development and strategic importance of ARM Holdings.
• ARM’s technology continues to shape the future of computing, from mobile devices to emerging technologies.
• The acquisition by SoftBank positions ARM for further growth and innovation in the technology sector.

"We're going to go literally from Isaac Newton to the Apple Newton to Masa and SoftBank and beyond."

• The narrative underscores ARM's historical roots and its ongoing impact on technology.

These notes provide a detailed and comprehensive overview of the key themes and ideas discussed in the podcast episode, suitable for in-depth study and understanding.

• The Acorn RISC processor, developed by Sophie Wilson and her team, had around 30,000 transistors, significantly fewer than its competitors.
• Despite having fewer transistors, it outperformed the Intel 80286 due to the 80/20 rule, which emphasizes that 80% of effects come from 20% of causes.
• The processor was named Acorn Reduced Instruction Set Computer (ARM), marking a significant advancement in computer engineering.

"The Acorn processor, the RISC processor, when they finish, it has only about 30,000 transistors on the chip. And yet because of this 80/20 rule, it actually has better performance than the 22 86."

• Explanation: The ARM processor's efficiency and performance were due to its design philosophy, which focused on optimizing the most critical functions.

• The IBM PC and its clones dominated the market due to compatibility with DOS and later Windows, which were built on Intel x86 architecture.
• The market's preference for DOS and Windows created a duopoly between Microsoft and Intel, overshadowing superior technologies like ARM.

"By the time it launched, Microsoft was on the scene, right? And DOS was around and DOS ran on Intel X 86 architecture."

• Explanation: The dominance of DOS and Windows, which were incompatible with ARM, hindered ARM's initial market penetration.

• Running software across different chip architectures was challenging due to the tight coupling between programming languages, compilers, and chipsets.
• The ARM team had to reimagine the entire ecosystem to leverage their innovation, which was difficult during the PC wave dominated by Intel.

"It was thought to be basically impossible to make your programming language, which is written in C and using the standard C compiler, work well across different chipsets."

• Explanation: The complexity of making software compatible with different architectures was a significant barrier for ARM's adoption.

• ARM processors functioned with significantly lower power consumption, sometimes even without a dedicated power supply.
• This unexpected efficiency was due to the reduced number of transistors, which consumed less electricity.

"It turned out they sometimes would function even without a power supply."

• Explanation: The ARM processors' low power consumption opened new possibilities for mobile computing.

• Hermann Hauser, one of Acorn's co-founders, foresaw the potential of mobile computing and started the Active Book Company to develop PDAs.
• The ARM processor's low power consumption was ideal for mobile devices, leading to its adoption in PDAs.

"Herman's like, I think mobile computing, like, everybody's all about desktop PC computing right now, but, like, think about everything you could do if you had a computer around in the world with you."

• Explanation: Hauser's vision for mobile computing aligned with ARM's strengths in power efficiency and performance.

• Apple, under John Scully, was also exploring PDAs and needed a low-power, high-performance chip for their Newton project.
• Apple collaborated with ARM, leading to the creation of the ARM 610 processor, which powered the Newton.

"I need to have this right now. So he goes over, he meets with Sophie and the engineering team over there, and he's like, this is great. This is the chip we need here at Apple for the Newton."

• Explanation: Apple's need for a suitable processor for the Newton led to a pivotal partnership with ARM.

• To facilitate the collaboration, ARM was spun off into a separate company with investment from Apple, Olivetti, and VLSI.
• This separation allowed ARM to operate independently and license its technology to other companies.

"They spin off the chip division of Acorn into a new separate company that they can then license this processor design from."

• Explanation: The formation of ARM as a separate entity was crucial for its growth and ability to collaborate with multiple partners.

• ARM's CEO, Robin Saxby, introduced a business model that included upfront licensing fees, engineering services, and royalties on each device sold.
• This model aligned ARM's success with its partners' success, fostering widespread adoption of ARM technology.

"What if we say, like, okay, when we do this, you pay us an upfront licensing fee for the rights to our core RISC technology, and you pay us for our engineering time for embedding with you, and we'll make money on that. But let's get aligned on actually shipping units."

• Explanation: ARM's innovative business model ensured mutual benefits and long-term partnerships with device manufacturers.

• ARM's flexible approach enabled the development of systems on a chip (SoC), integrating multiple functions into a single chip.
• This integration was particularly beneficial for mobile devices, leading to the widespread use of ARM technology in smartphones and other portable devices.

"Arm is like, no, no, we're aligned with you. We want you to make the best products and ship the best devices, and we'll embed our technology and our teams with you."

• Explanation: ARM's collaboration with manufacturers facilitated the development of SoCs, which became standard in mobile computing.

• ARM's processors have shipped in over 130 billion devices, highlighting the massive scale of its impact on the technology industry.
• The company's initial collaboration with Apple and its innovative business model were key factors in its widespread adoption.

"130 billion."

• Explanation: The sheer number of devices using ARM processors underscores the success of its technology and business strategies.

• ARM's technology continues to evolve, with its processors being integral to modern smartphones, tablets, and other mobile devices.
• The company's ability to adapt and innovate has maintained its relevance and dominance in the semiconductor industry.

"All the Samsung chips, Qualcomm chips, TI chips. Like, every chip, your phones have multiple chips, but at the core, most of the technology is being done on one actual piece of silicon."

• Explanation: ARM's processors remain at the forefront of mobile technology, powering a significant portion of the world's electronic devices.

• Early Cell Phones and the Nokia 6110:
  • The Nokia 6110 was one of the first major consumer GSM phones, marking a significant shift in cell phone technology.
  • This phone featured the ARM processor, which allowed for more advanced software, such as the game Snake.

"Snake was the killer app because ARM processors were literally like before the Nokia 6110, the processors in cell phones weren't good enough to even run Snake."

• Transition to Smartphones:
  • Early cell phones were more like embedded devices, whereas modern smartphones are effectively PCs.
  • The development of iOS involved stripping down macOS and adapting it for the ARM chipset.

"The fact that iOS and Android works the way it does today on this chip, that was nothing like what they were originally architected for is mind blowing."

• Technological and Cultural Reasons:
  • Microsoft had various mobile operating systems, but they were based on different codebases and architectures, limiting their adaptability.

"Microsoft had Windows Mobile and Microsoft had Windows CE and embedded Windows and whatnot."

• Inflexibility in Architecture:
  • Microsoft Windows and DOS were designed for complex instruction set architectures (CISC), not the reduced instruction set computer (RISC) architecture like ARM.

"Microsoft Windows and DOS only ran on complex instruction set architectures, right? They're not going to re architect that whole thing to run on RISC architecture."

• Porting macOS to Different Architectures:
  • Apple had experience porting macOS to different architectures, such as from Motorola processors to Intel.

"Apple had always been much more open about their architectures that Mac OS ran on, that OS X ran on."

• Preparation for iPhone:
  • Apple had been secretly making macOS compatible with Intel chips years before announcing it, which gave them the confidence to adapt iOS for ARM.

"The crazy thing is that you guys don't even realize it's been that way for a year. And all the operating systems dating back a year or two years, I think."

• ARM's Growth and IPO:
  • ARM went public in 1998, raising significant capital and achieving a market cap of 264 million pounds.

"They do a dual IPO both on the London Stock Exchange and the Nasdaq."

• Financial Lifeline for Apple:
  • Apple's investment in ARM paid off massively, providing crucial funds that helped the company avoid bankruptcy.

"They make $792 million in profit from selling their armstock over the next couple of years. And literally, that is what saves the company."

• Diversification Beyond Cell Phones:
  • ARM processors are now used in a wide range of devices, including cars, microwaves, refrigerators, and sensors.

"By 2010, arm partners are now shipping over 5 billion devices every year."

• Masa's Interest in ARM:
  • Masa Son of SoftBank saw the potential in ARM's technology and ecosystem, leading to a $32 billion acquisition in 2016.

"Masa's like, 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."

• Strategic Importance for SoftBank:
  • The acquisition aligned with SoftBank's vision of ubiquitous computing and laid the groundwork for the Vision Fund.

"This deal and this vision of computing everywhere and what it'll enable becomes really the prototype for what SoftBank is now doing with the Vision fund."

• Licensing and Intellectual Property:
  • ARM does not manufacture chips but licenses its designs and instruction sets, earning a cut from every chip manufactured using its IP.

"They have this large component of their business that is just licensing the instructions and architecture."

• Lock-in and Ecosystem:
  • ARM's ecosystem and the widespread adoption of its instruction set create a strong lock-in effect, making it difficult for competitors to displace them.

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

• Potential for Apple to Develop Its Own Architecture:
  • Apple could potentially develop its own instruction set and compilers, further expanding its vertical integration.

"They could write their own instruction set. I mean, this is like way bleeding into tech themes and random future forecasting."

• Challenges for Other Companies:
  • Companies like Google face more significant challenges in re-architecting Android due to its diverse ecosystem.

"Google with Android is kind of the Microsoft. It's actually a little bit worse of a position than Microsoft because you can't guarantee that it's an intel chip."

• Importance of ARM:
  • ARM's technology and business model have had a profound impact on the tech industry, influencing everything from mobile phones to supercomputers.

"This is like a hardcore technology episode. But now we're gonna shift. Grab the wheel and shift back to, like, crazy, you know, James Bond style. Softbank and Masa."

• SoftBank's Vision and Future Investments:
  • SoftBank's acquisition of ARM and subsequent investments through the Vision Fund highlight the strategic importance of ARM's technology in the future of computing.

"SoftBank corporate sells a 25% stake in arm at cost to the Vision fund. So the vision fund takes $8 billion right off the bat and buys 25% of arm from SoftBank Corporate."

• The Vision Fund has a 12-year lifetime, necessitating a return on investment within this period.
• SoftBank's strategy involves significant growth investments, even if it leads to short-term financial losses.
• ARM's headcount increased by 50% post-acquisition, indicating heavy investment in growth.

"Now there's a ticking time clock because the Vision Fund has a twelve-year fund lifetime."

• The Vision Fund has a limited time to realize returns, creating urgency in investment decisions.

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

• Post-acquisition, ARM significantly expanded its workforce, reflecting SoftBank's growth strategy.

• ARM's operating margin dropped from 52% to 24% despite revenue growth.
• ARM posted a net income loss of $200 million in 2018.
• The company is investing heavily in future technologies, including AI and autonomous vehicles.

"Their operating margin was 52%, their operating margin now is 24%, even though they've grown from 1.6 billion in revenue to 1.8 billion in revenue."

• Despite revenue growth, ARM's profitability has decreased, indicating higher operational costs or investments.

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

• ARM is diversifying into new markets, focusing on AI and autonomous vehicles to drive future growth.

• SoftBank acquired ARM during a favorable currency fluctuation post-Brexit.
• The acquisition was financed through the sale of Alibaba and Supercell shares and a $9 billion loan.
• SoftBank's acquisition strategy aims to avoid value-destructive sales to competitors.

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

• SoftBank capitalized on favorable market conditions to acquire ARM.

"They sold $10 billion of Alibaba shares and $7 billion of Supercell shares, plus they took a $9 billion loan."

• The acquisition was financed through strategic asset sales and loans.

• The acquisition allowed ARM to invest in growth without the pressures of public market expectations.
• ARM's technology is foundational to various industries, making its growth beneficial to the broader tech ecosystem.

"This I think is value creating to the world. If you believe that those 4000 really brilliant physicists and Ph.D.s and chip designers... will continue to produce IP that will enable us to have continued innovation."

• The acquisition is seen as beneficial for global technological advancement due to ARM's foundational role.

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

• The change in ownership allowed ARM to pivot its strategy towards long-term growth investments.

• The optimistic scenario (A) involves ARM capitalizing on the ambient computing wave, leading to exponential growth in device integration.
• The pessimistic scenario (C) involves ARM struggling to capture significant value from new markets, resulting in lower-than-expected returns.

"If you believe that we're going to transition from sort of somewhere between one and a dozen that we regularly interact with to hundreds."

• The optimistic scenario hinges on widespread adoption of ARM technology in ambient computing.

"The fastest growing portion is software and services. This sounds like the Apple narrative of all is well, even though our core business is flat to declining, we're making it up in services."

• The pessimistic scenario suggests ARM might struggle to capture substantial value from its core business, relying more on ancillary services.

• Successful companies often innovate both technologically and in their business models.
• ARM's focus on future technology waves aligns with this principle, aiming to stay ahead of market trends.

"If you can really innovate on both of those, then that is when really, really, really powerful things happen."

• Innovation in both technology and business models is crucial for sustained success.

"When it comes to startups and investing, it's so easy. People make the mistake of focusing on what your tam is today versus the much more important question of what your tam is tomorrow."

• Forward-looking market potential (TAM tomorrow) is more critical than current market size.

• ARM's future success depends on maintaining its technological edge and avoiding obsolescence.
• The company needs to navigate the competitive landscape and potential new entrants effectively.

"Is there going to be something else to the proliferation of devices and make ARM sort of look like the old grandpa technology?"

• The risk of new technologies displacing ARM's architecture is a critical concern.

"To the extent that ARM actually has ecosystem lock-in and commands a lot of value for doing that, and in some way they're the point of integration."

• ARM's ability to maintain ecosystem lock-in and command value is crucial for its long-term success.

• The SoftBank-ARM acquisition is a complex, high-stakes investment with significant potential for both success and failure.
• The outcome will depend on ARM's ability to innovate, capture new market opportunities, and maintain its competitive edge in a rapidly evolving tech landscape.

"I hope we did justice and communicated a little bit about the technology, a little bit about the business model, hopefully a lot about the story, but also why this is, no matter what corner of the technology ecosystem you live in, this is an important one to understand."

• Understanding the intricacies of the SoftBank-ARM acquisition is essential for grasping its broader implications in the tech industry.