The mystifying, acrimonious battle between Arm and Qualcomm

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On paper, Arm and Qualcomm look like natural allies in some of the chip industry’s most important new markets.

As Arm’s low-power chip architecture moves into big new areas like data centre servers, PCs and cars, Qualcomm is one of the companies leading the charge, designing chips based on Arm’s technology. The two are natural allies as they look to move beyond their strongholds in the mature smartphone market.

So when Arm sued Qualcomm more than two years ago in a licensing dispute, it clouded an important chip industry partnership. From the start, this looked like a spat over how to divide up the royalties pie from the use of Arm technology. The way this battle has played out, however, has fed growing concerns that the fallout from the fight will not be so easily contained.

Investors and the tech world have been mystified and more than a little concerned about why the two appear as far apart as ever. Barring a last-minute settlement, the dispute is heading for the unpredictability of a jury trial in December. The anxiety became more acute this week as Arm turned the legal screws on its rival, hammering both companies’ stocks. 

The fight revolves around Qualcomm’s quest to supercharge its move beyond the smartphone market with its 2021 acquisition of Nuvia, a chip start-up. Nuvia had designed its own “cores”, or the basic building blocks for processors, based on Arm’s technology.

Qualcomm gave up making its own cores nearly a decade ago and instead, like most in the industry, buys cores that are designed by Arm itself. So the Nuvia deal introduced an element of competition to the relationship: Qualcomm would still rely on Arm’s underlying chip architecture, but over time would become less dependent on Arm’s cores.

In its legal complaint, Arm has claimed that Qualcomm has no rights to use the Nuvia technology without Arm’s permission — an apparent attempt to force Qualcomm to the bargaining table and extract higher royalties. 

The twist this week came as Qualcomm unveiled its first, well-received smartphone chip based on Nuvia’s technology, as well as its use of the technology in cars. Arm’s response a day later was stunning in its severity. It issued official notice that it plans to cancel a key licence to Qualcomm in 60 days’ time, cutting off that company’s ability to ship chips based on anything other than Arm-designed cores.

The cancellation would not affect many current Qualcomm products, but the company has clearly staked its future on Nuvia’s technology and its rollout of a new generation of products is already well under way. And if Qualcomm cannot ship chips, many device makers that use its products would grind to a halt.

Perversely, perhaps, the stock market’s immediate reaction was to punish Arm more than Qualcomm, wiping 9 per cent off its stock price after its licence cancellation threat, compared with the 3 per cent drop for its rival. True, Arm depended on Qualcomm for 10 per cent of its revenue last year, meaning its own business could be dented if it follows through with its threat. But for Qualcomm, the immediate risk of losing its so-called architectural licence from Arm, and seeing its technology road map blocked, looks far more extreme.

The drastic legal threat appeared to stir deeper anxieties that this dispute may not be headed for a smooth resolution and a return to business as usual. Besides the budding competition between the two, the relationship soured after Qualcomm became one of the main opponents to Nvidia’s attempted acquisition of Arm, which was eventually blocked by regulators.

The legal escalation seemed to stoke wider concerns. Arm, which receives only tiny royalties for each device that ships with its technology, has been bent on increasing how much it gets paid. The sight of it levelling such a legal weapon against a key customer is hardly likely to make others feel secure.

There has also been uncertainty about how Arm’s business model will evolve as it looks to become a more important supplier to its customers. Qualcomm’s move away from buying Arm’s cores highlights Arm’s heavy reliance on a handful of big customers.

Whatever the worries, it is Qualcomm that faces the most immediate and drastic threat from this legal showdown. Arm’s latest salvo looks like a clear signal that it wants to settle, rather than head to trial. If the two sides can find a new way to carve up the pie, it would calm a lot of nerves.

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