Qualcomm vs. Arm: What are the best and worst-case scenarios?
Softbank is reportedly planning Arm IPO while locked in a high-stakes legal battle with Qualcomm. Although the case is becoming a game of chicken, because of its enormous impact on many stakeholders, including the litigants, the huge Arm ecosystem and especially the two major markets – personal and cloud computing – it is worthwhile to understand the best and worst case scenarios.
Before analyzing those, it is also important to address lingering questions and confusion about the case.
Clearing the confusion and misconceptions
Generally, anything related to licensing is shrouded in secrecy, creating confusion. Fortunately, the court filings have clarified some questions and misconceptions people have.
Is the case only about Nuvia Intellectual Property (IP), or does it affect the other licenses Qualcomm has with Arm?
It's only about Nuvia's Architecture License Agreement (ALA) with Arm and products based on Nuvia IP. None of Qualcomm's other designs and products, which are covered by its existing license with Arm, are affected.
The case will be in court for more than 2-3 years. Can Qualcomm develop and commercialize products based on Nuvia IP during that time?
Yes. So far, Arm has not asked for injunction relief against Qualcomm. Even if asked, it is highly unlikely that it will be granted. Injunctions are hard to get in the US, and Arm must explain why it waited so long. So, Qualcomm can use Nuvia's IP while the case drags on in the courts. Qualcomm has already announced Oryon CPU based on Nuvia IP and is working with several PC OEMs.
Can Arm unilaterally cancel its licenses with Qualcomm?
No. Qualcomm claimed to have a legally binding licensing contract for several years in the court filings. So, unless Qualcomm violates any conditions of the agreement, Arm can't unilaterally cancel the licenses.
As alleged in one of the court filings, can Arm change its practice of licensing to chipset vendors and instead license to device OEMs?
Arm can't change licenses of existing licensees such as Qualcomm, Apple and many others, as they have legally binding agreements. But for any new licenses, Arm is free to engage with anybody it wishes, including device OEMs.
With these questions clarified, let's look at the various scenarios.
Best and worst cases for Qualcomm
The best case for Qualcomm would be winning the case. The win would disrupt the personal and cloud computing market and revolutionize smartphone, auto and other markets. That means it will keep paying Arm at its current ALA rate for all the products that incorporate Nuvia IP.
The absolute worst case would be losing the case and all the following appeals (more on this later). But a realistic worst-case scenario would be settling with terms favorable to Arm. That means its ALA rate will go up. It is hard to predict by how much. The upper bound will probably be the rate in Nuvia's ALA.
Best and worst cases for Arm
Surprisingly, the best case for Arm is not winning the case and the court ordering Qualcomm to destroy its designs and products (more on that later). Instead, it is the case heavily tilting to its side, making Qualcomm settle on terms favorable to Arm, even before its IPO. Those terms will depend on Qualcomm's success with Nuvia IP, Arm's IPO valuation and Soft Bank's patience in extending the IPO timeline. It would be reasonable to agree that the upper bound would be the Nuvia ALA rate.
A settlement would also help calm the nerves of its other licensees.
The worst-case scenario for Arm is the status quo, where Qualcomm pays lower ALA rates instead of 20-30 cents per device Technology License Agreement (TLA) rates for all devices based on Nuvia IP. In my view, this is one of the reasons for Arm to go the litigation route – there is a significant potential upside if it can force Qualcomm to pay more. The downside is tied to litigation costs and a long, protracted legal fight can cost hundreds of millions.
There will be a substantial downside in the medium and long term, especially considering its IPO plans. A significant part of its revenue from Qualcomm is at risk if the latter moves all its design to Nuvia IP, and starts paying meager ALA rates. Additionally, this fight will unsettle the Arm ecosystem, and many licensees, including Qualcomm, will move aggressively to the competing RISC-V architecture. All of these will reduce Arm's IPO valuation.
Absolute worst-case for everybody
The absolute worst case for the litigants and the industry will be Arm winning the case and the court agreeing to its request that Qualcomm destroys all its designs and products based on Nuvia IP. I think it is highly unlikely to happen. If at all, the court might order Qualcomm to pay punitive damages, but ordering to destroy years and billions of dollars of work, some of which consumers would already be using, seems excessive.
For the sake of argument, if all the designs were to be destroyed, Arm would have lost its biggest opportunity to expand its influence in the personal and cloud computing market. Among all its licensees, Qualcomm is the strongest and has the best chance to succeed in those markets. For Arm, this would be akin to winning the battle but losing the war. I think Arm is smart enough to let that happen.
Similarly, such destruction would be bad for Qualcomm as well. It would have lost all the time and money invested in buying Nuvia and developing products based on its IP. That will also sink its chances of disrupting personal and possibly cloud computing markets. Again, just like Arm, Qualcomm is smart enough to let that happen.
Losing such an opportunity to disrupt large markets such as personal and cloud computing would also be a major loss for the tech industry. This will also make any of Arm's licensees almost impossible to acquire and the whole Arm ecosystem jittery. That will be a significant hurdle in the ecosystem's otherwise smooth and expansive proliferation.
Hence, my money is on settlement. The only questions are when and on what terms.
– Prakash Sangam, Founder and Principal, Tantra Analyst