Nvidia/Arm will not make an easy marriage

Nvidia is acquiring Arm from Softbank in a $40 billion dollar deal (much of it in stock, thanks to Nvidia’s high flying valuation). And while this seems like an interesting merger of complementary technologies, there are a lot of challenges that could make this a very problematic combination.

First, the acquisition will give many of Arm’s licensees pause, especially Qualcomm, Broadcom, and other chip providers, and perhaps even Apple? Suddenly an open licensing model is owned by a chip producing competitor. Nvidia claims it will keep the open model in place and Arm will operate separately, but that’s unlikely over the long term. Arm historically is an IP licensing company with no chip making capabilities to compete with its licensees. This is very similar to an open source model so prevalent in software. That gave it tremendous momentum in licensing its IP. Now it’s going to be owned by a company that sells chips. That creates a very different dynamic.

Ultimately, Nvidia wants to be a major player in the overall chip space and compete with the big guys (e.g., Intel), particularly in the data center with its graphics capabilities, and in AI. This is a lot of where its growth has come from in the past couple of years and is important to its success. I suspect Nvidia sees Arm as an avenue to being a full service data center supplier. But a number of companies have tried to push ARM as a viable data center processor, and particularly as a cloud solution, with little success.

Qualcomm, which has a large amount of experience and credibility, had a data center product based on ARM architecture a few years ago (Centriq) and couldn’t make a go of it. Same with AMD. There are some smaller companies still trying, and Google and AWS have ARM licenses to do their own thing, but it will be a tough road to get any significant traction. So this is a risky gambit for Nvidia at best, and historically the company has not been great at producing a full processor family, even though it tried (and with ARM cores at that) and failed.

It even bought a wireless modem vendor (Icera) in 2011 so it could integrate the modem into its chips. That was primarily targeted at the red hot mobile space, but that effort was a failure. Now it is targeting the data center, where the biggest potential for growth lies. But will it be successful this time around? It remains to be seen how well the company can compete against Intel and AMD with an ARM-based, GPU centric offering for the data center/cloud. Being a full capability processor supplier is harder than just being really good at designing GPUs.

Nvidia has the best technology in the GPU space and has been very successful selling into the PC and now data center space with its GPUs. Will it try to push Arm to adopt its own GPU instead of the current Arm GPU family called Mali? What does that mean for Arm IP licensees? Qualcomm has created its own GPU design, called Adreno, as it did not get enough capability out of the Arm designs, as did Apple and others. Mali is really not the most powerful GPU, so any improvements Nvidia offers could be helpful to the market. But many chip suppliers will not want to be tied to a company they see as an ultimate competitor.

You could argue that Arm gives Nvidia a strong position to go after the mobile market. And the acquisition could help on that front, but most of the major smartphone vendors use chips from Qualcomm, which directly competes with what Nvidia is trying to do in GPU and AI (Qualcomm does its own thing here, not even using the basic Arm IP now available), and Mediatek which licenses the Arm IP but which generally competes at the mid to lower tier on phones (and there are others, too, like Samsung and HiSilicon/Huawei that make their own Arm IP chips). So I don’t really see Nvidia becoming a major chip supplier to smartphones anytime soon. Even if it decides to offer a complete chip, it will likely be at the higher end and would have to compete directly with Qualcomm, which would be hard to beat given its market position and product strength.

There is also a strong psychological negative impact on the combination of Nvidia and Arm for licensees. Will owning Arm give Nvidia a competitive advantage in the market, since it won’t have to license and pay a royalty for the IP it would use in producing chips? And will others be willing to subsidize Nvidia by paying a royalty to Arm? Will licensees worry their proprietary use of Arm IP might somehow be compromised or used by Nvidia? I think this will be an issue, not in the short term, as you can’t just rip and replace technology, but longer term, especially for the biggest players who have the wherewithal to go it alone and ultimately move away from the Arm IP if they perceive it as a risk. This would likely take at least a 2-3 year effort, but it could happen if licensees are worried. Apple, for example, built its own chips for the Mac to get Intel out of its systems, and Intel was not a direct competitive threat.

Finally, will China allow this acquisition to happen? As publicly traded companies, they fall under the purview of regulatory agencies in the US, EU, and China at least. Arm is a UK-based company, and concessions have been made to increase R&D facilities in the UK, which may placate any pushback from the EU. But after acquisition, Arm may be considered a U.S. company. Will Arm technology licensing fall under the terms of the Trump administration boycott of China? Will it have to stop licensing IP to China, especially to Huawei, but also potentially to Mediatek (Mediatek is Taiwanese but still has lots of presence in China)? That would be a HUGE disruption. I don’t know the answer to that one, but it could be a big concern and might give China pause to allow the acquisition to go through…

So, bottom line, this acquisition is far from a slam dunk for Nvidia, as there are many longer term challenges it will face in the market.

Jack Gold is the founder and principal analyst at J.Gold Associates, LLC., an information technology analyst firm based in Northborough, MA., covering the many aspects of business and consumer computing and emerging technologies. Follow him on Twitter @jckgld or LinkedIn at https://www.linkedin.com/in/jckgld.

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