In March 2021, Qualcomm Inc. (QCOM, Financial) made a highly promising acquisition. It bought Nuvia, a disruptive startup founded by some of the industry experts behind Apple Inc.’s (AAPL, Financial) high-performance CPU cores, for $1.4 billion.
The acquisition bolsters custom chipset designs and is an essential stepping stone for Qualcomm, which does not design its own chips. Instead, the company licenses designs from Arm, and one of its goals with the acquisition was to gain the ability to design custom Arm chips like Apple does. Qualcomm is wasting no time in putting its new intellectual property to work, planning to incorporate Nuvia’s designs into Snapdragon:
“The first Qualcomm Snapdragon platforms to feature Qualcomm’s new internally designed CPUs are expected to sample in the second half of 2022 and will be designed for high performance ultraportable laptops.”
Many analysts have pointed out that this timeline is unusually fast-moving, even for tech. The acquisition was completed just a few weeks after it was announced, and in less than two years, Qualcomm is already stepping up to try and compete with Apple’s M1-powered laptops. The company aims to take full advantage of finally having total in-house design control to propel rapid growth.
However, there is a weak link in Qualcomm’s strategy. The company does not have as much control over Nuvia’s CPU designs as it would like because Nuvia also licenses designs from Arm. In March 2022, Qualcomm allegedly broke its agreement with Arm when its Nuvia licenses expired, and although Arm tried to fix the issue, Qualcomm failed to respond. Now, Arm is moving the dispute to court in order to protect its intellectual property rights.
The question now is, can Qualcomm pull off another miraculous courtroom win like it did against Apple, or is it setting itself up for failure in its over-eagerness to be the master of its own destiny?
Arm’s unique business model
In order to understand the Arm-Qualcomm-Nuvia conflict, we first need to understand how Arm’s business model works.
Arm makes its money through a combination of fixed upfront license fees when they deliver their intellectual property to clients and variable royalties from clients for each chip sold that contains Arm’s intellectual property.
The company's business model has been the source of much friction with its owners over the years because for a long time, it was not particularly profitable in spite of its incredible scale. However, now that the company has grown to have the world’s largest computing footprint, its profitability is improving. In light of this positive turn, Arm’s current owner, SoftBank Corp. (TSE:9434, Financial), is looking to spin it off into its own company. Thus, it is essential that Arm’s business model remains intact.
Arm alleges that the designs developed under Nuvia’s license agreements with Arm needed its approval before they could be transferred to Qualcomm. Qualcomm did not seek Arm’s approval to transfer the designs and, as a result, according to Reuters, “Arm is seeking an injunction that would require Qualcomm to destroy designs developed under Nuvia’s license agreements with Arm.”
Qualcomm is the party on shaky ground here. More likely than not, the company fully intended from the outset to take control of Nuvia’s Arm-developed designs without seeking Arm’s approval, unless its legal team and management made a massive oversight. Qualcomm almost certainly knew it would face a lawsuit over this matter, which would mean the company is intentionally leaving its fate up to success in the courtroom. That is a risky strategy.
The victory against Apple
While leaving things up to a courtroom battle is risky, Qualcomm has had some notable past successes in this area, the most famous being its battle with Apple.
In January 2017, Apple sued Qualcomm for withholding approximately $1 billion in royalty payments as retaliation for cooperating with South Korean antitrust investigations. According to Apple’s suit, Qualcomm insisted on charging it "at least five times more in payments than all the other cellular patent licensors we have agreements with combined."
Apple’s lawsuit followed the Federal Trade Commission’s own lawsuit against Qualcomm, which accused the company of forcing Apple into a baseband exclusivity deal from 2011 to 2016 by offering lower royalty payments.
Qualcomm denied the accusations and accused Apple of breaching contract, unfairly inciting regulatory action and stealing trade secrets to sell to Intel Corp. (INTC, Financial).
The companies settled their legal battle in 2019, with courts mostly ruling in Qualcomm’s favor. Apple made a payment to Qualcomm and the two companies reached a six-year license agreement, but after that license agreement is up, Qualcomm has not ruled out the possibility of continuing to pursue legal action against Apple.
The main takeaway from this is that Qualcomm has a history of success in taking aggressive legal action when the odds are stacked against it. Based on its past successes, it seems likely that Qualcomm always meant to get into a legal battle with Arm, believing that it can gain a favorable ruling.
Burning bridges
Regardless of whether or not it wins the courtroom battle, Qualcomm could be setting itself up for a lose-lose scenario simply by inciting the lawsuit in the first place.
If it loses, it might be forced to destroy designs developed under Nuvia’s license agreements with Arm, which would be an enormous setback. On the other hand, if it wins, it will be burning bridges with the company that both itself and Nuvia license essential intellectual property from.
Qualcomm’s acceptance of either of these scenarios implies a certain level of disregard for Arm’s future relevance. According to Reuters, some inside Qualcomm have been complaining that Arm is falling behind on the innovation front, attributing this to why Qualcomm’s chips have fallen behind Apple’s.
If Qualcomm truly believes that Arm is dropping the ball, as often happens when any one company gains too much market share in its industry, then it might not fear the possibility of losing Arm as a technology partner.
One alternative to Arm’s designs that Qualcomm could use would be RISC-V, an open-source instruction set that is beginning to gain repute among startups. Arm reportedly told regulators in December that “RISC-V’s momentum is accelerating.”
Arm must try and find a delicate balance between enforcing its intellectual property rights and avoiding pushing partners into seriously considering open-source alternatives, which could potentially work in Qualcomm’s favor.
Takeaway
It is too early to speculate on who will win the legal dispute between Arm and Qualcomm. At first glance, it may look like Qualcomm is setting itself up for a lose-lose scenario. However, given its history of successful legal battles and its disappointment with Arm’s innovation falling behind Apple’s, Qualcomm might be able to gain a surprisingly good outcome. I would still be worried if the company ends up being forced to destroy Nuvia’s Arm-developed designs due to its own stubborness, though.
