Based in the UK, Arm has issued Qualcomm a formal 60-day notice regarding the cancellation of their architectural license agreement, as revealed in a document reviewed by Bloomberg. This agreement enabled Qualcomm to develop its own chips based on Arm's proprietary standards.
This confrontation poses a significant risk to the smartphone and personal computer markets, potentially impacting the financial stability and operations of two major players in the semiconductor sector.
In premarket trading on Wednesday, Qualcomm's shares dropped approximately 5% following a Tuesday close of $173.18 in New York. Meanwhile, Arm's stock fell about 1.1% before the US markets opened, after closing at $152.58.
Qualcomm produces hundreds of millions of processors each year, which are integral to the majority of Android smartphones. Should the cancellation proceed, the company may be forced to halt sales of products that contribute significantly to its approximately $39 billion in revenue or face substantial damage claims.
This action escalates a legal battle that commenced when Arm filed a lawsuit against Qualcomm, one of its largest customers, for breach of contract and trademark infringement in 2022. The cancellation notice provides Qualcomm with an eight-week window to address the dispute.
Arm representatives have chosen not to comment on the matter. A spokesperson for Qualcomm stated that the British firm is attempting to "strong-arm a longtime partner."
The spokesperson further asserted, “This seems to be an effort to disrupt the legal proceedings, and the claim for termination is entirely unfounded. We are confident that Qualcomm’s rights under its agreement with Arm will be upheld.”
The two parties are preparing for a trial to address Arm's breach-of-contract claim and Qualcomm's countersuit. The conflict arises from Qualcomm's 2021 acquisition of another licensee of Arm and Arm's assertion that Qualcomm failed to renegotiate the contract terms. Qualcomm contends that its current agreement encompasses the operations of the acquired company, the chip-design startup Nuvia.
Nuvia's contributions to microprocessor design are pivotal for the new personal computer chips that Qualcomm supplies to clients like HP Inc. and Microsoft Corp. These processors are essential for a new series of laptops focused on artificial intelligence, referred to as AI PCs. Recently, Qualcomm revealed its intention to integrate Nuvia's design, known as Oryon, into its more prevalent Snapdragon chips for smartphones.
Arm claims that this action constitutes a violation of Qualcomm's license and is insisting that Qualcomm eliminate Nuvia's designs created prior to the acquisition. According to Arm's original lawsuit filed in the US District Court in Delaware, these designs cannot be transferred to Qualcomm without explicit permission. Nuvia's licenses were revoked in February 2023 after unsuccessful negotiations.
Bloomberg Intelligence analysts Tamlin Bason and Kunjan Sobhani noted in a research report that Arm's decision to cancel Qualcomm's architectural license appears to be a strategy to gain leverage ahead of the trial scheduled for December 16. They suggest that Arm's lawsuit against Qualcomm is likely to conclude with a negotiated license, allowing Qualcomm to modify Arm architecture but at a higher royalty rate than what Nuvia previously paid.
Like many companies in the semiconductor sector, Qualcomm depends on an instruction set developed by Arm, based in Cambridge, England, which has been instrumental in creating the foundational technology for mobile devices. An instruction set is the fundamental computer code that enables chips to operate software, including operating systems.
If Arm proceeds with the termination of the license, Qualcomm would be barred from creating its own designs utilizing Arm’s instruction set. Although Qualcomm could still license Arm’s designs through separate product agreements, this route would lead to considerable delays and result in the loss of previously completed work.
Before the conflict arose, both companies were strong allies that contributed significantly to the advancement of the smartphone sector. However, with new leadership at the helm, both are now adopting strategies that increasingly position them as rivals.
Under the leadership of Chief Executive Officer Rene Haas, Arm has transitioned to providing more comprehensive designs that companies can directly take to contract manufacturers. Haas advocates for greater recognition of the engineering contributions made by his company, which remains predominantly owned by Japan’s SoftBank Group Corp. This new direction encroaches upon the market of Arm’s traditional clients, such as Qualcomm, who incorporate Arm’s technology into their own chip designs.
Conversely, under CEO Cristiano Amon, Qualcomm is shifting away from utilizing Arm designs and is focusing on its own developments, which may render it a less profitable customer for Arm. Amon is also venturing into new domains, particularly computing, where Arm is also expanding its efforts. Nevertheless, the technologies of both companies remain closely linked, and Qualcomm is not yet positioned to sever ties with Arm completely.
Arm was acquired by SoftBank in 2016, and a portion of it was publicly offered in September of the previous year. The Japanese firm continues to hold over 80% of Arm.
Arm serves two categories of customers: those that utilize its designs as a foundation for their chips and those that develop their own semiconductors while only licensing the Arm instruction set.
Qualcomm is familiar with licensing conflicts, as a significant portion of its profits comes from selling rights to its own technology, which is essential for mobile wireless communications. Its clientele includes major players like Samsung Electronics Co. and Apple Inc., the two largest smartphone manufacturers.
Qualcomm achieved a significant victory in 2019 following an extensive legal battle with Apple. Additionally, the company secured a favorable ruling on appeal against the US Federal Trade Commission, which had accused Qualcomm of engaging in predatory licensing practices.