Season 4, Episode 2: ARM & SoftBank

Transcript from https://podmenti.com/t/4f4abf11e84d7480

'Cause I mean what's cool is like it is literally the ARM six ten that was developed with Apple for the Apple Newton.
Is the core of
All the ARM processors.
Welcome to Season 4, Episode 2 of Acquired, the podcast about technology acquisitions and IPOs.
I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts.
Today we are going to explore a topic that has flown relatively under the radar despite being the primary component of every single one of our phones.
Softbank's thirty two billion dollar purchase of the British based
Arm holdings.
For folks that listened to uh the previous episode that we did on Softbank, uh, you know they were once a Japanese telecom and multinational conglomerate now that has a
close to a hundred billion dollar uh fund that they they have it created massive disruption in the startup landscape and here we are diving into uh kind of the deal that that started it all and with just an essential piece of uh of technology that we all use every single day.
Listeners, you know that a few months ago we started our limited partner program for folks to go deeper on technology, startups, and VC topics with us. David, I wanted to say that I'm particularly pumped where we landed in our last episode on investment theses.
on ambient computing and processing happening everywhere as sort of the next enormous technology wave. So I think it's super relevant to this episode and uh we will find out
why as we dig in. So if you're interested or you just want to support the show and and like what we do, you should click the link in the show notes to consider becoming a prestigious acquired limited partner or go to Kimberlight.fm slash acquired.
All right listeners.
Now is a great time to talk about a new partner of ours here on Acquired, Lagora.
The agentic operating system that is redefining how the world's best legal teams work.
Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Legora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?
So the founders did exactly what great founders do.
operate with obsessive customer focus.
They embedded inside a massive law firm.
For months.
They sat with the lawyers just watching how the work really gets done.
And that's how you get features that customers love, like tabular review where you
Drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legor's bet here is interesting, since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.
And they recently launched Lagora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.
And Lagora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Ligora numbers essentially
speak for themselves. When they have a head to head pilot with their top competitor, they win seventy percent of the time. Legora now has over a hundred thousand lawyers on the platform from twelve hundred legal teams in fifty countries.
And crazily, they went from one million
To a hundred million in ARR.
In about
Eighteen months.
Yeah.
truly insane numbers. And that is the real test.
Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client.
If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at Lagora.com/slash acquired.
And just tell'em that Ben and David sent you.
Alright, David, I heard a rumor that you have one more thing for listeners.
Indeed. One more thing. We passed a million download in the lifetime of acquired.
Huge milestone.
And to celebrate
We are going to do
Uh you heard it here first. A worldwide virtual acquired meetup.
So we're gonna host this in Zoom. Ben and I are gonna be on video and we'll have everybody else in the Slack community. We've got a bot installed that's gonna do uh aggregate AMA questions and we're all gonna hang out. So we're gonna do it on February twenty first.
twenty nineteen.
At five thirty.
PM.
Pacific time.
Uh, we thought that would give everybody
You know, at least in in the US be eight thirty East Coast, five thirty Pacific, and uh it's nine thirty AM in China for our listeners in China.
So be there, be on Slack and on Zoom, and we will all hang out then.
David, uh
It's time.
It's time. Indeed.
Well
Today.
We're gonna be talking about
Arm holdings. And we're gonna go literally from Isaac Newton
to the Apple Newton.
To Massa and Softbank.
And beyond.
It's quite the scope, man. The first thing for for listeners to know before we d even dig in here, this chip company manufactures a total of zero chips, and in many cases they they don't even design them either.
Yeah. Well
We had to
The prestigious and well known silicon finally.
In
Cambridge England.
Home of
Isaac Newton, inventor of modern physics at Cambridge University.
The time.
Is nineteen eighty.
And in nineteen eighty, in England, the BBC, the British Broadcasting Corporation, uh, which controls, you know, the most popular radio and television stations across Britain and is a government entity.
They've teamed up.
with the UK Department of Industry and Department for Education.
And they're launching a major initiative
That they're calling the BBC Computer Literacy Project. And the goal is to educate the public and in particular young people at this time about.
computers and train them for the coming personal computer revolution that everybody thinks is right around the corner. And indeed it is. So they create a nationwide television series that they call the Computer Program.
Get it the
the computer program on television. Hey uh that they show on um I think it was on BBC two uh to the whole country. Uh it's a serialized program about how computers work.
But the cornerstone and the really cool ambitious thing that they're doing is they want to put
New
microcomputers, true like personal computers for the first time, into schools all around the country for children to learn and play on. So this is like super similar to this is like a government version of
Apple's strategy in the US at the time of getting Apple twos into schools so that kids can learn and play on computers with the idea that like eventually they'll grow up and then keep using Apple as they grow up. Google strategy today with the Chromebooks.
Indeed. That I think is working really well. Yeah, I think so too.
The BBC, together with the government, puts out a call for bids across all UK technology companies at the time to create this computer that they're gonna put into schools. And they end up awarding the contract to a little company in Cambridge called Acorn Computers.
Now, if you're a real computer history buff, you probably know about eight coin computers. But what what who were they?
So
They started life in Cambridge and
I believe they were initially called the Cambridge Processing Company or something like that. They they made CPUs. It was a play on CPU. They made processors for other companies, but by this time they'd started making their own fully integrated systems, you know, like the Apple II. And supposedly they chose the name Acorn because
It sounded like Apple, but it was ahead of it in the telephone dictionary directory. So when people were looking up computer suppliers in the telephone directory, they would see Acorn before Apple. Maybe that's how they won the bid.
So um they win the they win the contract and
They're uh they get to work on the device, they're hard at work at it, they know this is like a huge opportunity for the company. In December of nineteen eighty one.
They start shipping it to schools around the country and
And it's branded as the BBC Micro. And this is like a legendary computer in computing history. Like literally a whole generation of British kids grow up.
Um, with this as their first, you know, exposure to computers.
They end up selling over one and a half million units, almost all in the UK, which is like super good considering
The Apple two
was on sale for over 16 years and only sold six million units. So like, man, the power of like government-sponsored programs.
Crazy. So
Another thing though happened in nineteen eighty one that was
Pretty important.
turned out to be far, far more important than uh the BBC computer program.
which was that IBM introduced their first IBM PC
In the American market.
And
And the IBM PC was the first, like, personal computer that was
Yeah,'cause remember if computers before then
They were like in professional and business use, it was the whole client server model, you know, it was terminals to terminaling into the main framework servers.
Mainframes, all that. Like think about like what NASA was designing like the Apollo program on. You know, it wasn't personal computers. So when IBM introduces the PC and it's targeted at business and professional users, this is really like
Everybody in in the industry now is like, Okay, wow, like this is opening up
this whole huge market where like it's the beginning of like software is eating the world, right? Like now computers are gonna be on every desk of every worker in every industry, you know, in the world at some point. Um, with IBM, you know, the power of IBM behind this.
So
Acorn.
Realizes this.
And they're like, Okay, you know, like the BBC micro is great. This has been great for our company, but like it's an eight bit
microcomputer. Like it's a personal computer, but it's nowhere near powerful enough to
compete with the IBM.
P C
We need to we need to
create our professional computer. So they start a project.
They the Archimedes project. This must be like a legacy of, you know, Cambridge and academia and like
having these, you know, uh scientist and mathematician names.
They realized though the processor that they'd been using in the BBC Micro, they hadn't designed it. It was an off the shelf
eight bit processor from a firm called Moss Technology. It was called the 6502.
This is when uh processors had really cool names like sixty five oh two. Super, super cool. I miss that these days.
Yeah, I know. I know. Uh, although arms naming schemes are are
Not really much better than that. Yeah, but those end up those don't end up becoming consumer brands the way that like you know A eleven X or something like that does. Although A eleven X we've completely gone back never mind. It made sense when it was like A5.
So Bionic actually means nothing. Yeah, I well I don't know, but they actually don't mean anything. It's a marketing brand that doesn't it's not a modifier on the name of the chip, which is like A ten or A eleven. It is just a it's kind of like uh you know Mac OS ten point four leopard. Or I I think that's wrong, but um yeah. Anyway.
Too many digressions.
Too many digressions.
Anyway, so Acorn hears that Intel, uh, off in California
you know, their processor company everybody knows about at this point. They are working on the perfect
Processor.
that they can use in their new Archimedes project.
It's uh it's gonna be a sixteen bit processor. It's getting a ton of buzz.
And it is this is like a super famous in computer history. This is the eighty two eighty six processor, which would eventually become just the two eighty six.
Which successors would be the three eighty six, the four eighty six, and then the pentiums and then every modern
Intel chip that we know today. This was the first. The X eighty six architecture, if you will. Indeed. This is the first of the X eighty six. So Acorn's like, oh
Cool. Like, hey Intel, like we want to you know, be a customer to you guys. Can you like uh
you know, ship us over some so we can build some reference, you know, PCs and uh
Start working with you guys.
And for some reason, and this is gonna go down as like one of you know there are a few of these moments unacquired of like, you know, history turns on like a knife point, uh, you know, whether it's Blockbuster or uh or here Intel. Intel makes one of the worst business decisions in history.
in all of business history and says
No. You guys, you know, BBC Micro, come on, you're some like little
PC you know company in in Cambridge, you know, England. Not even Cambridge, Massachusetts, like
We don't care about you guys.
Yeah, surely nobody will ever uh you know decide to do something on their own when we tell them no and then eventually lead to our own demise.
I mean, we're Intel, like who else is gonna make
you know, high performance computing
microprocessors in the world except us, Intel. I I noticed you said high performance, so I I think that it probably is still true.
Well, depends how you define high performance. Um
So acorn
They are they're kinda out of options and they're like, Well
You know, what can we do? What do we have?
The one thing they have that basically, you know, very few other computer companies in the world, even really Apple at this point, have.
They have a ton of super, super smart
physicists and engineers and and early in the burgeoning field of computer scientists, students from Cambridge University, where they're located, that they've employed, you know, either as interns or full time staff. And these people are like super talented. And they decide, you know what?
Maybe we can just build our own microprocessor. Like we started as a microprocessor firm in another era.
Let's try it again.
They decide they they give it the task to
A team of engineers on staff, and they say, Okay, we need something super high power that can essentially compete with this.
Um with Intel's two eighty six.
Uh Chip. We need a we need
almost that good level of performance, but it has to be super low cost because like we're making this ourselves, you know, we don't have the global resources of of Intel behind us. What can we do?
And so
This team led by Sophie Wilson, who
was and is an incredible computer scientist. Um yeah, one of the
most important, you know, contributions to all of computing, as we see, that she implements here. She'd heard about
a paper out of, ironically, back in the Bay Area in California out of UC Berkeley that had just come out.
about uh detailing what a project would look like for a reduced instruction set computer.
Now, this is this is gonna be a a technical interlude, but it's super important to understanding, you know, again, what becomes probably one of if not the most important underlying technology company for
the whole industry right now. So
What are instruction sets? Ben, do you want to talk about this? I will. And I first off want to take a step back here and make a disclaimer that we acknowledge that we are dramatically oversimplify technical details in this episode. Uh we do this with apologies to those who find this too basic.
But also conversely, for those who find it to be esoteric on the other side of the spectrum, we are gonna dust off the computer science degrees here and uh and I would say in uh in true, you know.
Apple
fashion here, this show is, and really the whole technology industry is the intersection of, you know, engineering and and the liberal of technology and the liberal arts. And uh
That's what this is here. You're about to get a dose of technology. So
Before we dive into what is a reduced instruction set architecture, it's worth diving in what came before it, the complex instruction set architecture. And even before that, like what the heck is an an instruction set architecture? Like why are we w w why? Okay so the instruction set architecture you can think about as sort of the language of a chip.
So a CPU has uh a variety of components on it, places where you can store information, places that temporarily hold information, places that
tick the clock and move all the information one step forward in the process. And the way that it does all of this saying, hey, go store that over there in that register. Or hey, advance the whole clock, you know, one step so that uh we can move this thing out of that register and and push it off into into memory or something like that. All of this happens.
Inside the CPU.
in in your computer, whatever device you're using right now.
Yeah, and what w at what speed? I don't know, like uh hundreds of thousands of times per second or millions of times per second. I mean that the this happens incredibly fast, but it requires a a language. It's sort of like a its own programming, and it's the the instructions or the instruction set that the the chip itself speaks. And so
Originally, the way that this was done uh was with Cisque.
And this was really the the complex instruction set computer where um instructions were
Well, first of all, there were a lot of them. They were very, very sort of malleable. So they could do things like take multiple clock cycles to achieve a complex instruction. Um it was like multiplying numbers, dividing, transforming numbers, all sorts of stuff. Right. Right.
it would sort of do as much as it possibly could using uh the the hardware circuitry. So it was really about, hey, this is gonna be powerful hardware, so we're gonna write a language that leverages all the very unique and and powerful components that are actually on this chip.
It could have
uh without getting too complex on these things, variable length instructions, so you had to m y you couldn't rely on a set of assumptions about how long each instruction uh was gonna take time wise or was gonna take up space wise. So
While it provided the programmer with a lot of power, it required a a tremendous amount of sort of uh
tight coupling with the hardware and and complexity.
Yeah, recent and and that translated to
At the time, everybody was thinking about number of transistors on the chip and associated memory that you needed to support the data that was going through all those transistors over time, and much more importantly, that would translate into power consumption. The CISC CISC complex instruction set.
architecture computers, that is what Intel processors are. So Intel like the the set of instructions that is Cisque comes from Intel and all Intel X86 processors are
Cisque.
complex instruction set computers.
What Acorn at this time and
Sophie Wilson.
What they were picking up on out of academia was like maybe there's a different approach to how you could build these processors. I've actually never seen this written about as low end disruption, but this is almost like classic low end disruption where we say, you know, what if we punt on a lot of those things that everyone previously thought was important and
solve a problem with a very different set of constraints where it's gotta be cheaper
It's gonna be less sophisticated, so there's less components on the chips. There's gonna be less instructions that are available for the the programmer to use. Um and really it's not the programmer, it's it it's actually the compiler that translates what the programmer writes into the the instruction set. But
It's really rethinking it from the ground up and saying, what if every instruction could only take one clock cycle? It could work on sort of a variety of different components, but making this really hardcore set of assumptions. Um, it was this software centric design instead of a hardware centric design, so it was kind of portable.
It could use a very limited number of of addresses and limited number of
of registers. So in all aspects of it, it's it's sort of worse. It's y you could sort of describe it as as worse in every way, but I'll turn it back to you, David, for so h how does that actually end up being disruptive and better?
What uh one of the team member original team members who worked with Sophie on designing this would write later, you know, you could think of it as it's the eighty twenty rule, right? Like these risk reduced interest struction set
uh architecture.
the machines, uh processors that that Acorn designed, they were
Uh, they only could do about eighty percent of the
instructions that Cis could do, but they did those instructions. They executed them much, much faster, like on one clock cycle instead of multiple clock cycles per instruction. So when you needed to do
those complex, you know, other instructions that were in the twenty percent, the chips would slow down hugely. But the thing was you just didn't do them that much. So like the eighty percent that you were doing most of the time, like they were really, really good at. You were spending a lot of money to build this sort of uh sophisticated components onto the chips so they could handle those things that you just weren't doing that often.
To put some numbers on this, the 2286, the the famous Intel processor that started the X86 line, the first one of those had about a hundred and thirty thousand, a hundred and thirty-four thousand transistors on the chip. The acorn processor, the risk processor, when they finish it, has only about thirty thousand transistors on the chip.
And yet, because of this eighty twenty rule, it actually has better performance than the twenty two eighty six. So it's like way cheaper to make, and it has actually better performance for most applications. This is like huge. This is a huge leap forward in in
Engineering and computer science.
So they do this, uh Sophie and the team create this like in a very short period of time.
They decide that they're gonna call this chip the Acorn Reduced Instruction Set Computer Machine.
A R M.
Arm. Boom.
And the world changes. But not
Just yet. The groundwork was was laid for the world to change, but it it wasn't yet. It's not like, you know, here we are in the eighties and Intel starts doing poorly. Uh you know, these things take a long time.
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This is really interesting. We've just went deep technically on what's going on. There's this huge innovation. Why didn't the first ARM chip and the Archimedes that launched in nineteen eighty seven with this chip, why didn't it blow
the IBM PC and the IBM PC clones out of the water. Well, this is like a market forces thing. So by the time it launched,
Microsoft was on the scene, right? And DOS was around and DOS ran on Intel X86 architecture. And then eventually Windows would run on top of DOS.
And started getting so much market share and all the applications that all these business and professional users needed, they were all running on DOS.
DOS didn't run on Archimedes or the Risk architecture computers. So for a long time, for the whole entire PC wave,
Everybody in the industry knew that
Other types of architecture, risk based architecture, which aren't pioneered, but you know the Motorola Power PC, like what Apple was using at the time.
It was fundamentally better technology than
But because of the duopoly between the Wintel duopoly between Microsoft and and Intel.
It's almost like nobody really cared.
It's important to understand what role a compiler plays in all this. So why is it that they couldn't just
Run the run Windows, run DOS on you know these better chips.
Until recently, and there's been a lot of really great advancements in really commercializing this sort of crossover technology recently, it was thought to be basically impossible to uh make your programming language, which is you know written in C and and using sort of the standard C compiler work well across different chipsets.
Especially when you have so many layers of translation from the application to the operating system to the kernel, you know, eventually getting getting, you know, actually executed on a chip. And there's a lot of sort of assumptions that are baked into um the programming language, to the compiler, to the chip.
and sort of uh assumptions around those things being coupled together. And so it's sort of much more difficult than you would think to rip the layers apart and say, well, we're just going to run this on a completely different architecture. You know, Sophie and Team did this amazing thing of coming up with for a d you know for a different scenario, uh a much better
better instruction set architecture. However, basically nothing would run on it and they needed to kind of think about the world in a whole di different way and convince everyone else that they should think about the world in a whole different way in order to leverage that innovation they created.
Which
wasn't gonna happen during the P C
wave because you know the network effect flywheel was like in full swing at this point. You know, you've got Lotus, you've got, you know, all these application providers writing for as we talked about, writing for Microsoft, which only worked on Intel. So boom, there you go. Two, you know, multi hundred billion dollar companies come out of that wave and Acorn is left in the dust.
So
as you would think they're they're kind of in a bleak position here now. They've put a ton of resources into this new Archimedes
project that they think is gonna be
You know they're gonna ride this next P C wave.
They're getting knocked.
you know, this is probably the end of the company, right? And and actually it is. Uh Acorn itself ends up getting acquired by an Italian um computer company called Olivetti.
around this time and they end up just exiting the PC business.
All together.
But there was something also that we haven't talked about yet that was pretty interesting about these arm.
Processors that they were building.
And this is another just like crazy thing of history that like nobody they didn't expect it. So when they developed
the arm processors when Sophie and the team
developed it. The goal was
Same level of performance.
ended up being slightly better for a lot less cost. Like put fewer transistors on the chip because that's gonna cost less. But what it turned out, they they would put these these processors into the PCs, into the Archimedes prototypes,
It turned out they sometimes would function even without a power supply and
And the team at first they were like, This is like crazy. What is there like a ghost in this machine? Like how is this
How is this processor working without a power supply?
It was it like what residual
Well, it was it was without a dedicated power supply to the processor. And this is like crazy because at the time, like, you know, CPUs were the most power hungry components of
The whole thing
Yeah, PC.
So like there was power running into the machine, but just not a dedicated line into the CPU.
And it turned out that because there were so many fewer transistors on the chip
Um it needed much less electricity and power to be able to run, even at really high
Performance. And so it was actually just sucking power from the other components in the circuit on the chip, and it was still able to function.
And they were like, Whoa this is
Crazy.
So it turned out after Acorn gets acquired by Olivetti, one of the two original co-founders, this guy Herman Hauser, who also was a a Cambridge physics PhD, he leaves and he's thinking, which a a couple of people are thinking in in technology at the time, you know, PCs are here.
But what's the next wave gonna be? This is like, you know, people thinking about VR right now or or a couple of years ago. Like we're in the middle of the mobile wave, but like what's next?
And it's worth sort of like r simplifying what we have right now. We have
a thing that uses a completely different architecture that's not really compatible with everything the rest of the world uses, but is much cheaper to make high performance and requires less power.
Mm-hmm, mm-hmm. And so Herman's like, you know, I think
mobile computing. Like everybody's all about desktop PC computing right now, but like
Think about everything you could do if you had a computer.
around in the world with you, like not tethered to a desktop.
He goes and he starts a company to
try and pursue this vision of computing. He calls it the Active Book Company, and he wants to focus on making PDAs, personal digital assistants, which are mobile devices. And what's super important for mobile devices, battery life. So and this is nineteen eighty eight.
This is nineteen eighty eight. So battery life is v very important. Right. Very important. I think uh lithium ion batteries get like fifteen percent better every year, so compound that back
Thirty years like they were bad. Yeah, right. Like how long does your iPhone last today? Like not long enough, you know, imagine back then. Um but there are just not that many people in the world that are thinking like 1988. Shoot like I think I got my first computer at that point. I was like four years old and uh
It was a massive like, you know, hunk of metal that sat on my desk and probably used, you know, half of the house's power supply. Like Well is an X86. What do you expect? Yeah, right, exactly. Um So So Herman, he's like, he's focusing on PDAs and he's like, you know what I think could make this happen?
Is these processors we developed back at ARM
So he goes back to the chip team at Arm and to Sophie and he's like, Hey, can you like
rework this whole thing.
to really optimize for power consumption with while still maintaining this high performance.
So if he's like, Yeah.
We can do that. And uh they do.
And it works. And they start producing these chips with um
uh their longtime silicon partner.
uh VLSI because again, Acorn didn't have the resources to be manufacturing their own semiconductors at this point. So they used uh a fabricator VLSI to make their silicon.
Well, at the same time, who else is thinking about PDAs out there? This is nineteen eighty eight.
Apple and this is where the other Newton not Isaac.
comes into play.
So Apple Apple's under Steve Jobs is left at this point. He's getting kicked out of the company.
John Skullly is CEO and John Skullly's, you know, great white whale.
Is
the same thing as Herman Hauser. It's the personal digital assistant. You know, Skully gets like such a bad rap, but like he actually
had you know a vision that like very few people in computing, you know, did at the time. Not even Steve. I mean Steve was off doing next, right? Like he's trying to make a super powerful work station.
Come on, what's the difference between being wrong and being too early? Nothing. Uh but good for the world that he was wrong and too early because
Skullly puts
Larry Tesla, uh at Apple on this Newton project, which is his his pet project.
And Larry is amazing. So Larry came from Xerox Park. He was like an OG original computer guy. He invented copy paste. He's he's like
leading the SWAT team within Apple that's gonna build this, you know, computing platform of the future. He knows he needs a low power
high performance chip, he first goes to ATT, which was working on a on a you know low power chip called the Hobbit.
Which you can't make this stuff up, just like you would expect from a chip from ATT called The Hobbit in nineteen eighty eight.
It sucked. Like it was
Terrible on every dimension. And um, this is fun. I think one of my carve outs a few episodes ago was Jerry Kaplan's book, Startup.
And Jerry he was the founder of the Go Corporation here in Silicon Valley, which was also
trying to work on a PDA at the time.
They had ended up getting acquired into ATT.
And form the backbone of the hobbit.
Anyway.
Larry
gets introduced, he's chatting with people in in the silicon industry, trying to find better chips.
He's chatting one day with someone at VLSI and they're like hey, you know, we've got this partner
Acorn over in the UK.
And like they're not doing too well. You know, they were trying to compete with you guys in the telephone directory, but one of their founders is doing something kinda interesting right now also in mobile computing.
And they have this chip that's
working pretty well. You might want to check it out.
And Larry's like
I need to have this right now. So
He goes over.
He meets with uh with Sophie and the engineering team over there.
And he's like this is great. This is the chip we need.
Here at Apple for the Newton.
But I can't license this tech from Acorn and Holivetti. Like we're competitors. We need to we need to create a structure that can work here. So
They architect a deal.
Wetty.
N VLSI, they spin off the chip division of Acorn into a new separate company that they can then license this processor design from.
They do it super fast.
Within like six weeks of
when uh when they get together.
They've spun out the company into a new
Division a new t new totally separate company.
Called.
Arm.
This blew my freaking mind that ARM was started
it as a J V with Apple on the Newton.
It's crazy. So Apple invests.
one point five million into the company. So Acorn and Olivetti are bringing the engineering group. They assigned twelve engineers to the new company.
Uh VLSI is the silicon fabricator partner. They get an equity stake.
Apple brings the money.
They get forty three percent of the company for one and a half
Million dollars. Again, talk about a delutive seed round. To blow out the irony of this
I'm gonna jump forward just to foreshadow like
All of the A series chips are ARM processors. Like the thing that is so differentiating about the iPhone, I mean there's a lot of things, but one of the things that they're just years ahead on is being able to have some of the best processors in the world.
all based on the ARM instruction set architecture. We will get to how these companies have sort of parted ways over time, but oh my God, they were actually involved in the s founding of it.
It is no overstatement at all to say that
Without
The Newton.
project within Apple.
Arm as a company would not exist.
the phones, you know, whatever device you're listening to this on right now would look very different. You might have it plugged into a wall, which you almost assuredly don't.
It's crazy. It's crazy.
So
These twelve engineers, they do the spin off, they get the one and a half million from Apple.
These twelve engineers go down the street in Cambridge. They set they set up shop in a converted barn. Uh and um they bring in this guy, Robin Saxby, who had been an executive at Motorola, uh, to be the CEO of the new company. And they
Get to work with Apple. They're working super closely. Like they're taking the core risk processor technology that they own, but it needs to be super customized and fit into.
a chipset that's gonna work within this small device, the Newton. Um so they're working hand in hand and app with Apple to create it.
And they make the processor it.
It's the ARM six ten.
And that goes into the Newton and every every Newton, the first Newtons that shipped all had the ARM six ten processor in them.
And then it would get upgraded over time, but uh it would power every Newton.
Now, ironically, remember Herman Hauser, the original Acorn co founder, who had started ActiveBook and kinda set all these wheels in motion. He ends up selling ActiveBook to
to ATT of all people in nineteen ninety one, and ATT demands merges it in with the assets of Go that it had acquired, which is now EO within ATT only.
they could do something like this. They force it to start using the Hobbit processor. And of course, I don't know. I think
I think these these PDAs did end up shipping, but like they were so bad and it completely fails in the market.
David, the rabbit holes that you went down for this episode, I I believe achieved new heights. Oh man. This is so much fun. Speaking of failure, though, I mean
A T T was like
obviously stupid with you know the Hobbit processor and and go read the book startup like it's so good about all the ridiculousness that went on around this. The Newton also
Of course, famously.
fails even though they have the ARM processor and it's just too early. Like the world isn't ready for this. So catch me up. Like I didn't research this part at all. How does well what happens to ARM post Newton failure? So
When
The Newton actually gets around to shipping in nineteen ninety-three. It's now been over two years that Arm's working exclusively with Apple.
Um
The Newton ships and like it's it's clear pretty early, like there aren't gonna be enough unit sales here that like
It's like the home pot of PDAs. Yeah, it's the home pot of PDAs. So this is where Robin, the the CEO for Motorola, who came in
This is where he
Makes
a couple really, really brilliant decisions. And we've talked about in previous episodes that like one of my tech themes has been recently that like when you can marry
a huge technology wave with a key business model innovation, like we talked about in the Tencent episode, like that's when something
Magical happens.
And so what did Robin do? He was like, Okay, well, we need to work with other partners here. We can't be dependent on just Apple and just Newton to buy a lot of chips from us, because they're not gonna they're not gonna pay us a lot uh in licensing fees here.
But he's also realized that like part of the magic of what made this processor really work wasn't just that like ARM designed this chip.
and like handed it over whole cloth to Apple, it was that they
really embedded with the engineering teams on the Newton and made something like pretty customized that worked specifically for this device. And so he's like
You know
I bet we could do this with
Lots of people.

Give them this core processor, this core risk processor.
Technology.
we could embed within their teams and we can help them develop essentially custom silicon.
for their
Use cases.
And you know what?
is really interesting here. Like
If we could create a business model that aligns with this, what if we say like
Okay, we're when we do this, you pay us an upfront licensing fee for the rights to our core
Risk technology.
And you pay us for, you know, our engineering time for embedding with you and we'll make money on that.
But let's align get aligned on like
actually shipping units. We want you to ship a bunch of units. We want you to ship a bunch of units. So how about we take a small royalty
on every device you ship that has our technology in it. And then at the time like this is like okay, somewhat interesting. Like how many devices could potentially ship that are like mobile computing devices. So ARM gets
gets paid three times. Like they they get the license fee from, hey, you know, you get to use the ARM technology. You know, our our this instruction set architecture is one that you have the privilege of using on your chip. And there's sort of two ways that that can work. Either
They design the chip for that that uh manufacturer or they say, Here, you you feel like you're a good designer, and this is sort of how Apple's relationship works today. You use our instruction set uh and and you do it.
So then they get paid the second time for actually embedding with them. That's their sort of software and services line of business. And then they get that third time, which is every every unit sold, you know, they get a tiny little piece of uh
The cost of of each CPU that's shipped out.
Yeah.
Well, you know, it turns out I mean
This is one of the things that
makes the technology industry magical.
A very, very tiny piece of a pie.
That is
Literally
almost a hundred times bigger than every person in the world combined uh which
uh the number of devices in the world is at this point.
Turns out to be a very, very large slice of pie. Do you know how many ARM chips have shipped to date?
I do, but
Why don't you go for it?
Hundred and thirty billion.
Yeah. That's billion with a B.
And and think about that. Those are
Arm chips, each of which is
the core processor in a device.
So that is a hundred and thirty billion
Devices.
Not necessarily true. Lots of devices have Well many devices have multiple chips within them, yes.
Uh but still, like you know, it's uh okay, reduce that by, you know, a factor of
four or five or whatever, like that's still like way more than there are people on earth.
Yeah, that was a thought first contract to sign that they get some upside on units shipped. Yeah. And what's also cool, so uh again, like I I think this is such a cool example, Armes, of
technology and business model
playing together and and like making each other better. So like obviously there's the financial aspect of this.
What's interesting on the technology side too, because ARM now like all the other chip companies take Intel, for example, they're like use our, you know, Adam seven whatever chip or core I blah blah blah.
I am going to give you this chip, you are going to put it in your device.
Because ARM is like, no, no, we're aligned with you. We want you to make the best products and ship the best devices, and we'll embed our technology and our teams with you.
we can collaborate on designing it however you want. So this is what really it's ARM.
uh and this model that starts to enable systems on a chip to be
uh really take off. So what is a system on a chip? Like back in the
PC days when that we were talking about earlier, you know, a system, a PC, you had a motherboard, you had a processor, you had a graphics card, you had a sound card, you had a black. I remember plugging all this stuff in and building my own PCs back in the day. Yeah, man. Put it all in your PCIe slots and call it that. Exactly. Oh man. Incredible. Is that PCI?
Express. That was the that was the latter generation. Yeah. That was like oh man.
Crazy.
So people start to realize, especially in a mobile
Environment. Like well what if you could just put
All of that just on one chip instead of having separate chips and buses and motherboards and whatnot. Arms like Yeah, cool. Like
Put our processor in one chip as part of it. Like we'll we'll help you with that. And so
Apple now with the core, you know, the A
A A fifty seven, you know, bionic Superman chip. Um, yeah.
Uh all the Samsung chips, Qualcomm chips, T I chips, like
Every you know.
Chip but your phones have multiple chips, but like
At the core, most of the
Technology is being done on one actual piece of silicon.
This was the transition from the era of sort of the just discrete CPU to to system on a chip, which is, you know, where we are today.
Yep. And so
Actually that same year in nineteen ninety three, and like again so much kudos to
arm the company and to to Robin the CEO for turning this around.
The same year that the Newton ships and they realized this isn't gonna work, they sign a landmark deal with Texas instruments and
to provide the core of a a processor
That
Nokia has contracted with TI to go into the Nokia six ten or sixty one ten. We'll try and put a a link to this in the show notes. Once you see this phone, you are going to remember this phone. This is like
I think the first cell phone I
had was like a variant on this. Yeah, this is the candy bar phone. This is the first major consumer
GSM phone.
that is sold uh certainly in America and and all over the world.
And this is what starts, you know, the kink in the curve of cell phone shipments that ends up, you know, with smartphones and where we are today.
David was talking earlier about why you know these these arm chips were
You know, even though they were better in a lot of ways, they couldn't penetrate the duopoly of of Microsoft and Intel and Windows running there.
You can start to see now.
You know, the software that ran on that Nokia phone that I'm sure everyone played Snake on is nothing like the software that ran on Mac or on Windows. Snake was like the killer app because
Because arm processors were literally like before the the Nokia sixty one ten.
The processors in cell phones weren't good enough to even run snake.
But now you have this low power, high performance processor that can run games, right? And you can like draw a direct line from there to, you know.
Farmville to Clash you know, clash of clans to everything. Right.
The bridge that hasn't gotten crossed yet is
how we went from that, which really I mean that phone i it felt more like an embedded device than really like phones as we know today. And phones today are are effectively PCs. And if you think about the work that was done to create the first version of iOS, it was really to strip down Mac OS
And people always harp a lot on this like strip down Mac OS to to create iOS and it still uses the name Darwin kernel and all that stuff. But the other crazy piece of work that had to be done to bring a computer operating system to um to these mobile phones was adapting it for the ARM chipset.
Like
to bring PC operating systems to something that would operate on the these chips that like
Weren't getting a lot of power.
And had you know completely different instruction set, the fact that
I iOS and Android works the way it does today on this chip that was nothing like what they were originally architected for is mind blowing. You know what's interesting. I didn't I didn't put two and two together till right now, but I
I strongly suspect
You know, if you think about it, like
Why did Microsoft miss mobile? There are lots of reasons, right? Like cultural, you know, what have you, technology, you know?
But
Actually like this specific technology reason I think could be
Could be
One of the major
Points that you know, Microsoft had Windows Mobile, right? And Microsoft had Windows CE and embedded Windows and whatnot, right? But like
Those were completely different code base. Completely different code base, right? That wasn't Microsoft Windows because Microsoft Windows and DOS only ran on complex instruction set architectures, right? They're not going to re-architect that whole thing to run on risk architecture.
Yeah. I mean they do they do now. Yeah, they do now. Why could Apple do this?
Apple had always been
much more open about their you know about their architectures that Mac OS ran on
Um that OS ten ran on, right? And like
Oh, did they already do the transition from
The Motorola processors, the Motorola power PCs to uh Well they had the Yeah, they had to pour it into the X86 Intel
uh with with uh OS ten, right? So they were much less wedded to, you know, an open to porting
their Mac O Mac OS and OS ten into different architectures.
And indeed they had this Newton uh DNA as well.
For folks who don't n know specifically what we're talking about, so the iPhone came out in two thousand seven, which
Holy God they put
Mac OS on an ARM chip.
Two years before that, the thing that we're referencing here is
uh in a very Jobsian keynote that continues to go down in history as just an amazing piece of showmanship. Steve Jobs came out and said, uh, so we're changing the uh chips that are in all the new Macs away from the power PC that we've been using to using Intel, which of course
was so dramatized and Paul Delie w walked out on stage and oh my God, a uh you know, Apple is using Intel and and the you know, look at all the old wars that are there still there's still the ground is burning from all the carnage and wreckage of those old wars and here's what's happening now. And Steve of course says
And the crazy thing is that that you guys don't even realize
It's been that way for a year.
And the all the the operating systems dating back, you know, a year or two years ago. No, it was multiple years, yeah.
Yeah, have been capable of doing this and uh you guys just didn't know it. So uh go buy yourself uh a new computer and all your old stuff will work on it. David, you're right. I I think that that did give them sort of the confidence to say, like, well, you know, I guess I guess we could start
When of course at that point in time the iPhone project was well underway, but you're probably getting close to shipping, because I think it was two thousand six, right, when that happened. I wonder how similar those efforts were. Yeah. Interesting. Well
Anyway, to rewind back to ARM. So
This is happening, uh they do this T I deal, the Nokia sixty one ten launches
Things are all basically up into the right indefinitely from then, uh for arm.
So at the end of nineteen ninety seven
Arm is doing over twenty five million pounds in revenue and they're profitable.
Um, they do a dual IPO both on the London Stock Exchange and the NASDAQ. Because remember, they have British shareholders, Italian shareholders, and
and Apple American shareholders on april seventeenth, nineteen ninety eight, they priced the IPO at five pounds and seventy five pence
Per share.
Which
translates to a market cap of two hundred and sixty four million pounds. Now the exchange rate was stronger back then, but still
My God, I wish I could have invested at the IPO. It grows hugely throughout the tech bubble, especially. And this is this is so awesome. I can't believe this isn't gonna be like a footnote in this episode, but like
I want to highlight here.
This saves
Apple. The ARM IPO had it not happened.
very likely Apple would have gone bankrupt because
This is nineteen ninety eight.
Steve Jobs had just come back into Apple. Scully was ousted. The company's bleeding cash. Like they are like seriously facing bankruptcy. And what, it's a decade later, but they still own that share of ARM.
No, no, no, no. They start liquidating the ARM shares, and thankfully they don't liquidate all at the IPO. They start sh selling slowly over a couple of years as the ARM stock price is going crazy.
Apple remember they investe one and a half million. They make seven hundred and ninety two million dollars
In profit.
from selling their arm stock over the next couple years. And literally that is what saves the company. Like
It would have gone bankrupt without that. Imagine being an uh an analyst. Like n now there's a an army of Apple analysts, but like then you know, imagine being an Apple analyst and you're like, uh okay, yet another quarter where all of their it wouldn't even be operating income, but all of their profit is coming from liquidating this thing that's going to run out.
I mean, that was literally what kept the company afloat.
Kind of amazing while while Steve was, you know, preparing
what would become the IMAC.
um and consolidating the product lines and ironically killing the Newton. So when the tech bubble bursts, uh when the internet bubble bursts and the telecom bubble bursts in two thousand one
Arm of course, you know, takes a blip and shipments basically like plateau for
you know, a year, maybe not even, but again, like this is such a huge wave, like
By two thousand two, they pick back up.
to the point where in twenty ten
ARM is now ARM partners are now shipping over five billion devices.
every year. Again, so almost as many people as there are on the planet, arms partners are shipping devices. So like, you know, these are these are aren't just, of course, cell phones. These are, you know, microwaves. These are refrigerators. These are cars. Like cars have a lot of arm chips in them. These are
uh sensors and devices, anything that needs a low power, high performance embedded processor.
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So
Typically this would be where we would, you know, wrap up our history in fact. Company's just growing nice. IPO, you know. Yeah, you know, we'd we'd uh we'd grade the IPO, we'd say, like, man, you know.
It's kind of crazy.
I I'm not sure we would be doing this episode if
Softbank hadn't bought them'cause it is sort of like
If you've beared with us this long in this episode, you probably agree. It's this sort of obscure technology company that has an absolutely inane business model.
Before moving forward, David, it is it is worth putting a fine point on the business model
where they don't manufacture chips
About
half of their business or a little bit
less I think comes from designing the chips and then licensing those out and then, you know, they have this this
m large component of their business that is just licensing the instruction set architecture. Like
They have now managed
Through the value they've they've created through the intellectual property, but also the lock-in they've created by building an ecosystem around
their instruction set.
They just license their instruction set and it means they get a cut of all chips.
that are manufactured using their IP.
And
That that sort of continues to blow my mind that
somebody doesn't say like sorry, that's not your lunch.
Like and and and this isn't like a trivial amount of money. I think it's something like if you look at the iPhone, I think they make like
thirty five cents per unit. It's something like one to two percent of the chip selling price, depending on which of their business models it was uh
um manufactured under but like
Thirty five cents of every
You know, A series chip.
W why is it that they've managed to to hold on and actually get a cut of every single chip manufactured?
I think it's probably two things. One
The
continue to have truly
Excellent.
Processor and and
Tip.
engineering and design talent, right? So they truly are one of the world class, you know, best
processor design companies in the world at a time where advances in both performance and power consumption for processors are
More important than ever. But I think also it's it's the same reason why the Wintel Duopoly existed, right? Like even though Apple is more flexible about moving architectures than, you know
uh Microsoft was uh back in the day.
Android and and iOS run on risk architecture chipsets. Are they really gonna re architect them for something else? There even is there is no other thing to re architect to.
Yeah, that's true. They would you would have to come up with your own instruction set.
Build your own
set of compilers to enable.
operating systems. Apple does a lot of this anyway. Like Apple's one of the companies that actually could probably uniquely do it. Cause they could write their own instruction set. I mean this is like way bleeding into tech themes and random future forecasting, but like they could write a new compiler, build it into X code, make it so that every app that's that's compiled just
works on their new chipset that's not arm based that they launch. Just like they did with Intel back in two thousand six.
Right. And it wouldn't surprise me because th they've they've taken over not only their own I mean, they don't manufacture their chips, but they design their own ships. They of course license the ISA from from ARM.
But like it does just seem like it would be one more expanding of their vertical integration to say, actually it's gonna be based on our own architecture now too. So color me in for that prediction in the next three years.
Interesting. And and also Apple's uniquely
position to be the only company to do it because
Google's not gonna do it with Android because Android is a diverse ecosystem. You need ARM to be
the architecture to be the standard across the case.
The chip mean you know, T I, Qualcomm, whoever, Broadcom, all the partners you need, plus Google, plus you know
Whatever what have you.
Google with Android is kind of the Microsoft
It's actually a a little bit worse of a position than Microsoft'cause you can't guarantee that it's an Intel chip.
It's probably a Qualchetcom chip, but it could be a bunch of things. Mm-hmm.
Well, to pull back for tech themes, back to our actual acquisition, because that's the name of the podcast. This is like such a um
Uh such a schizophrenic episode because until now, like pulling us into the future. This is so
important this company and this technology and I hope we've done a uh a good enough job communicating that
But this is like a hardcore technology episode. But now we're gonna shift grab the wheel and shift back to like
Crazy, you know, James Bond style.
Soft bank and mass up.
Okay.
So
This brings us to two thousand sixteen.
All is well in the world, arm is
Winning, you know, based in Cambridge, doing great engineering, working with partners, got their great business model.
Did did about one point six billion in revenue the previous year. Yep.
The stock price is is having a huge run because the financial community is starting to wake up to this fact that like, Oh, hey
Uh, if I want to ride the mobile wave and I want exposure to this, Armin's like a really good way to do it. Yep. We shipped fifteen billion units in twenty fifteen. Like it's a things are happening. Yep. So
Thanks to Fast Company and
Katrina Brooker and friend of the show, David Lidsky, and their great piece on Massa and Softbank that just came out.
We know what happens here.
So it's summer of twenty sixteen.
And Massa is hosting a dinner for tech industry luminaries.
at his amazing nine acre estate in Woodside, California.
Which is like a super
Tony.
uh community, you know, right outside Palo Alto, right uh right over two eighty. Uh this is where Steve Jobs
uh mansion was that he never built out. Uh this is where Larry Ellison's whole compound is and Massa has like an equally
Amazing compound there. He's toasting a dinner.
One of the attendees at the dinner had
Is
Simon Sagar's
Who had joined ARM back in nineteen ninety one, right after the spin out. He was an engineer and he was the sixteenth employee.
At this point he's risen through the ranks over the years, he's become the CEO.
And
He's kinda like, you know, his job is like steward of this ecosystem. And like obviously everyone uses ARM, but like SouthBank is an important partner because they're one of the world's biggest telecom operators. And so like he wants SoftBank to
You know, make sure that they understand how important ARM is in the chipset of the phones that they're selling. It's like okay, great.
I'll go to this dinner.
I'll you know, hang out with Masa. So they're sitting there at dinner and
And Massa starts like focusing on on Simon and he starts asking
him a bunch of questions about, you know, what ARM does, what the business model is, you know, all the various devices that
uh arm chips end up being used in. So Massa's like, so what what exactly
Do you guys power? And he's like, Well, we power everything, you know? We're not just in phones, like we're in cars, we're in coffee makers, we're in refrigerators, wearables, we're starting to get into servers, like actually because of this power consumption issue, like supercomputers, like
Power is a limiting factor on performance, so they're starting to use us.
Massa's like mm.
Interesting. Uh so then Masa asked him.
what you know now has famously become
the the the question that he asks every vision fund investment.
Which is
What would you do?
If money were no constraint. And Simon's just sitting there at dinner and uh he's like um
Well, I guess we'd probably uh keep
Doing everything but
But faster. And uh's like Hmm, okay. So Simon goes back to Cambridge, back to the UK, uh to arm, very different from uh the environment he was just in. He's sitting there a couple days later, back in Cambridge.
And he gets a call from Massa in Tokyo.
And in typical master fashion, he's like, I need to see you right away. And not just you, but I also need to see ARM chairman Stuart Chambers, chairman of the board.
Um and this this is the best part of David's uh David's reporting here. This is this is great. Well, it's it's uh we we alluded to this uh in the carve out on on the last show. So there's one problem, which is that Stuart
Is on vacation.
And he's on a yacht in the Turkish Mediterranean. But like Mazza doesn't like yachts in the Turkish Med, like that's that's his ball game. Like that doesn't faze him. He's like, Okay, well, you know, uh hang on
I'm gonna call him. He calls him and he's like
Uh I need you to dock your boat.
in Marme, Turkey, which um is like a resort town on the Mediterranean coast in Turkey.
Masa then sends a private jet to Cambridge, picks up Simon, he jumps on his own jet, they all converge in Marmay, uh I think I don't know if it's Marmay French pronunciation or Marmace uh in Turkey.
Masa buys out an entire restaurant with like a view overlooking the marina. So there's nobody else in there. They all converge the three of them in the restaurant. And they sit down and Masa's like, I want to buy you guys.
And I'm gonna offer you thirty two billion dollars. Which was a almost a fifty percent premium to where they were trading.
At that moment in time.
And I want to do it now.
You know, like when there's a public to public acquisition, it sometimes is like
twenty, twenty five percent, we've seen up to thirty percent and in in you know more typical situations, but like a a four I think it's a forty three percent premium. Yep.
Typically with, you know, public to public acquisitions too, there's a lot of back and forth, and there's investment bankers involved, and like, you know, it's very rare that, uh
You get an Instagram style like done in the closed it.
Two weeks. Yep. They closed into th they announced uh the they got board approval.
And they announced within two weeks
Arm to remain an independent division within Softbank.
Softbank's gonna pay thirty two billion dollars.
To buy
The whole thing.
The market uh loves it.
It gets shareholder approval and
And it's done. This, as we alluded to at the top of the show, is
It was this model that
I'm sure Masa was already starting to think about the Vision Fund, but this deal and
This um
vision of
computing everywhere and what it'll enable.
becomes really the prototype for what
Softbank is now doing with the Vision Fund. So much so that the next year in twenty seventeen, when they actually get the fund set up, Southbank Corporate sells a twenty five percent stake in ARM.
At cost to the vision fund. So the vision fund takes$8 billion right off the bat and buys 25% of ARM from SoftBank Corporate.
So what do you think went on with that?
Why?
Well, I think Massa was always thinking about this as an investment.
Uh, it was just that before the Vision Fund the only way you had to invest was boundary.
Soft bank balance sheet. Yeah.
I mean now there's a ticking time clock,'cause the Vision Fund has a twelve year fund lifetime. So it's not like he can hold it indefinitely now, like the at some point they have to either sell that back to SouthBank, which I'm sure Massa doesn't want to do as someone who controls both entities, probably wants to in the next, you know, five to seven years
get a nice return on arm and sell it to someone else. So we haven't seen the last of this yet. Well, I think most likely, and this is what people started talking about after the
the transfer, the twenty five percent transfer into the vision fund is re IPO it.
I think that's the most likely outcome. But what's interesting, and this also speaks to the vision fund strategy. So
in two thousand sixteen
when SoftBank acquired the company, there were only about four thousand people working at the company, which on the one hand is a lot of people. On the other hand, like that's a lot less than Uber, that's a lot less than, you know, I think less than Airbnb at this point. Like for a company that old and that was like
literally the foundation of, you know
all technology at that point. I mean I think they have a ninety six percent market share of all
Smartphone and embedded devices. Embedded devices. Um
That's not a lot of people.
In the
You know, two plus two and a half years.
Since then,
ARM has hired over two thousand people. So they've grown by more than fifty percent headcount since they couldn't have done that if they were a public company because they're now losing money. They're now net income negative.
But Massa, again, like you know, it's his question, what would you do if money were no object?
Are they net income negative? So here's here's what I was looking at at that. They their operating margin was fifty-two percent. Their their operating margin at at the time of acquisition, their operating margin now is twenty four percent.
even though they've grown from one point six billion in revenue to one point eight billion in revenue, their EBITDA dropped forty percent.
Despite the revenue increase.
So I'm not sh sure if they're losing money, but they
That's interesting. They're selling a lot more devices. They're only make a little bit more money and their profits
significantly dropped.
Hm, interesting. Uh their margin dropped.
I just pulled it up again. I said there's an article that they
Post to the loss of two hundred million in
I believe
twenty
eighteen.
Which could be for
Lots of reasons. And obviously that's not operating margin. That's net income. The drum that they're beating and telling in investors right now is hold on, guys, we are way investing in growth and it will pay off. Um and then we're gonna do something about it when it does. And what's interesting, you know, they they still do quarterly presentations uh on company results.
what they're talking about now is how they're investing heavily into the next computing waves. So ARM has started now making
uh designs and devices uh chips that are
Dedicated for
AI use cases, but also for like autonomous vehicle use cases. So you think about, you know, Intel bought mobile eye for I think seventeen billion dollars. And mobile eye makes uh
chipsets for cars and in particular for computer vision for
And eventually
a fully autonomous uh
uh use cases, ARM is getting heavily into that market as well, as well as all sorts of, you know, embedded computing.
Yeah, it's interesting, because the stated reason at the time of purchase, um, and at some point here we'll we'll we'll breeze through the other sections of the show, but at the time of purchase, the the drum they were beating was it's IoT, that uh the Internet of Things is blowing up and because you know there's gonna be an ARM device and much more than your phone, it's gonna be in all these other things that are communicating with the internet around you.
That's why we believe that the growth is
It's like th Massa believed that there was some growth that was not priced in.
um that he believed was going to expand the market for IoT devices was gonna expand even greater than the the public market investors who owned ARM believed. Or at least that there would be some reason to believe that it would be generating more future cash flows.
And it was IOT, IOT, IOT. And it's interesting to see, you know, two years later now on some of their investor relations stuff that it really is more about the connected car and AI chips. So certainly their their devices shipped has has continued to be a really great story. They went from I think twenty fifteen
They were in uh they were fifteen billion and now in uh in at I think at the end of twenty
Uh when was this?
Twenty seventeen they did over twenty one billion.
Yeah, that's what I'm looking at too. There
Exponential growth continues to be really excellent.
But it is interesting, it's like on on what thesis
Do you have to believe in a specific thesis?
about where there will be more CPUs, um, specifically low power ARM CPUs, or do you just say, look, I don't have to believe anything in particular. I'm just pretty sure that these things are going to continue to be more and more everywhere. Yeah.
I'm in the latter camp, but
Should we jump to
acquisition category. Yeah. So funny, you know, we were setting this up all along for an IPO narrative, but
Boom acquisition.'Cause we've done so many recently. I know. Business line.
For sure.
Not even no no yeah. I don't think uh Softbank does anything else quite like ARM. So business line and it's fully independent. Okay, what would have happened otherwise? Like, you know, this is an interesting one. Uh I feel like this is the first interesting one in a while.
I have two interesting points to make on this one. So do you know how Masa got the cash to buy ARM?
Oh, interesting. Um
I did not.
So
It was interesting. The time when he bought it was actually at a currency fluctuation due to Brexit where the pound was not doing well. So he got a lot of blowback that uh you you know, you're taking advantage of a distressed asset here and he's pounding the table saying, No, I'm not taking advantage of a distressed asset. I really believe in this and I was just waiting for the cash to come in.
Where the cash came in from was they sold ten billion dollars of Alibaba shares and seven billion dollars of Supercell shares, plus they took a nine billion dollar loan.
And Softbank does this pretty often. I think they they they take out these big, big credit lines to do do deals like this, which makes a lot of sense why you would switch to uh, you know, having a freaking huge fund if you're used to these multi billion dollar loans to finance acquisitions.
It's like, wait a minute, you pay me for using your money instead of me paying? I like this arrangement. It's kinda like the ESPN deal. Yeah. It is business model innovation.
All over the place here it acquired.
Yeah. So the my sort of theme of this section is interesting to look at the conditions upon which the deal got done. Uh so that's condition one, which is interesting to look at. The second condition is they were a nice deep pocketed Switzerland that this company could actually sell to that could finance
aggressive future growth. And if you think about other people they could have sold to, it
it would have uh been value destructive because if you sold to Apple, then
You know, qual comes.
freaking out that they're not gonna have access to to their core technology anymore. And same thing in in in you know the other direction. And so
the number of possible purchasers who have thirty billion dollars who or who can raise thirty billion dollars that are willing to plow a bunch of future
uh investment into your business.
That aren't
Strategically
Or or I guess structurally
sort of corruptive to where you want to operate in the market and in a value destructive way, pretty limited.
I I would say it's it's fortunate and and value creating for the world that it landed where it did.
Mm-hmm.
Yeah, I mean think about like we referenced at the top of the show that in many ways this became the model for
The vision fund and

You know, look, say what you will about the Vision Fund and there are certainly, you know, like anything, there's a balance sheet, right? Of like it's their positives and negatives to the ecosystem of it.
You know, this is a major positive, right? Like Arm is a public company, right? It had been a profitably operating public company for at that point close to twenty years.
It was the most
arguably the most important foundational computing company out there.
But like if they were to say to Wall Street
Hey, you know, we're gonna massively invest in growth right now. We're going to turn net income negative. You should expect losses for the next few years while we lay the groundwork for the next waves of computing.
what would happen, right? Like their stock would crash. Like they they were like gonna be prevented from doing that. And I think this is the core of, you know
In some ways it's like hilariously funny Moss's question of like what would you do if, you know, money were no object. But this is like this is what he means, right? Like and uh
I think in a lot of ways like SoftBank is a great home for this company for the time being.
David and I have gotten a lot of feedback on uh and listeners, we appreciate all this feedback that w we do a lot of uh talking about the
value that accrues to the acquirer, but we do very little talking about the value created in the world by a transaction happening. This, I think, is value creating to the world if you believe that those four thousand, you know, really brilliant physicists and PhDs and chip designers and computer scientists and technologists, if if you believe that
funding them, they'll continue to produce IP that will enable us to to have continued innovation and and
do things that we previously didn't think possible because it would produce too much heat or, you know, the consume too much energy or anything like that.
then yeah, I think this is incredibly value creative, both for
the ARM ecosystem and for sort of anybody who uses any of their products, which is all of us.
Mm-hmm.
Mm-hmm.
Totally.
It's it's a very much a you get the investors you a you ask for. There's a very reasonable chance that the public market was not a good place to uh
You know, to go stand on that hill and say we're gonna be
We're gonna be bad for a while, but it'll be great eventually. It's like you need someone else to sign up for that.
Right, right. It's very hard to ask
You know, once you have a certain set of investors, it's very hard to ask them something different from what you have been asking them without a without a change of control like this.
Yeah.
Yeah.
Uh Should we move into tech themes officially?
Yeah.
Yeah, let's do it. Finally. I've got two, which I know I've been
Yeah.
One is just like
disalignment that I talked about earlier of like
technology model and business model. Like if you can really innovate on both of those.
then like that is when really, really, really powerful things happen. You know, maybe in the theme of this episode and and Apple and and its involvement here, you know, it is the
the marriage of technology and the liberal arts, uh when you can do that.
That's one.
The other one that I I feel like I've been talking about more on the LP show. I can't remember how much I've talked about this on the um
uh on the main show, that I think this really illustrates very well is
When it comes to startups and investing
It's so easy. People make the mistake of focusing on what your TAM is today.
versus the much more important question of what your TAM is tomorrow. And this is such a great case study because like
When
Arm.
the spin-off was was getting started and and uh they were developing the risk processor.
You could have looked at it and been like, This is so stupid. Like the Tam you know, the market today is for
IBM P Cs.
And it's the
M the Microsoft, you know, Intel, Wintel Duopoly is getting started. Like this company's dead in the water. Like this is so stupid, right?
But
It was the Tam tomorrow of the coming mobile wave that that was the opportunity and that was what
Mattered.
Getting the timing right is super important. But if you can time
correctly when the TAM tomorrow is going to start to realize. And you can get out in front of that and
be building the technology, you know.
a couple of years in advance so that it's ready. Like that's that's magical.

I am looking at a graph here with about ten years where it looks like there's no growth in uh revenue timing, timing, timing.
Uh but it wasn't that long until from the time of the spin out
They got that TI contract for the Nokia sixty one ten
within three years of the spin out. So like the devices weren't shipping yet, but they were they knew it was coming.
Yeah.
That's a great point.
Um, I have no tech themes. I have said all of mine. Love it.
Love it.
Love it.
For grading.
What do you think about we've talked about for grading more recent events and I think this
still qualifies as a recent event, the South Bank acquisition. Um
Let's uh let's paint the uh the A plus scenario and the the C or C minus scenario over the next five years.
All right, so I'll I'll start with the A plus.
If you believe in the thesis that David and I um chatted about on the L P show that uh
that ambient computing is the next computing wave. So to sort of review the there was
PC and that it was a trillion dollars in that ecosystem of value created.
Uh then there was the the internet and then mobile.
and sort of what is that next thing and what is that next wave of computing upon which it uh uh platforms will be built that uh
you know, that enable entirely new use cases, new companies.
And
you know, a new way that people interact with technology and ambient computing is that thing, they're probably all gonna have arm chips in them.
be it the AirPods that David and I are both wearing now, or the watches that I think we're both wearing now. Um or uh
as as our friends on the uh the team that work there say, the lady in the tube that will respond to my voice when I get home. Um all the way down to sort of lit the litany of things that used to, you know, just be dumb embedded devices like the little oven timer.
Or the little oven clock.
There's a very reasonable chance that we have hundreds of of ARM chips that we're interacting with over the course of the day. That makes us look like a pretty smart buy.
Assuming that that was not already priced in.
So when we just like let's let's review that real quick. Um the thirty two billion was bought for eighteen X earnings and twenty nine X EBITDA.
So already a
You know, fairly expensive stock.
But
Yeah, still still feels like a good buy if you believe that we're gonna transition from sort of uh w somewhere between one and a dozen that we regularly interact with to hundreds.
Yep.
And it's funny, I'm just pulling up here.
Because of course arms still
reports their uh their results. It's awesome that they do that. I know it's so awesome that they do that. Okay, so
Totally agree.
That's the
A
A plus.

The C C minus case uh
I think I fall in the
A camp.
But just to paint the bear picture here.
So currently for the most current results we have
Total revenue for arm over the last five.
four quarters, so the trailing year of revenue.
It was one point eight billion.
So
They bought the company for the South Bank bought the company for thirty two billion two and a half years ago for a company that is still doing less than two billion.
In revenue. Um
That's a pretty big gap to fill, right? Like if you're anticipating like, you know, significant returns on uh on your acquisition from, you know, already two and a half years in the past, you need some of these new markets to start hitting and start hitting big real soon.
from uh from an IR perspective. And, you know, the
royalty portion of the company's revenue, which is the the alignment with with partners
Uh so that's that's the one that's dependent on number of units shipped. And that's really what, you know, I think the
investment thesis is about that like number of units of shipped is gonna gonna grow exponentially
Like
It is the largest revenue stream in the company.
But it's actually not growing that fast in terms of how much revenue they're getting. And I think that must be
because um they're just getting such a small amount.
uh from every device shipped. And as
The
devices proliferate and cheaper and more basic devices, you know, like sensors and the like become the vast majority of number of units. I bet they're getting fewer actual dollars from those.
Yeah it's interesting. And this is an area one other bear case is something that I'm not technical enough to evaluate, but
What arm?
was to mobile.
and Intel was to the desktop, is there gonna be something else to the proliferation of devices and make ARM sort of look like the the the old grandpa technology?
Like is there's some significantly lower power thing that uh you know literally just needs the vibrations of the EM spectrum in the air to power it or something really crazy. No, that's why I think like this is
in the full length of time. Like I don't see anything else on the horizon that can actually really replace
Um
ARM and the and the Risk architecture.
But again, if you look at their financial results, like the fastest growing portion is software and services, right? This sounds like the Apple narrative, right? Of like, you know, all is well even though our, you know
core business uh is is flat to declining. Like we're making it up in services. Like that's not as defensible. Um
So you know
I think that's this this this bear case is
the company, while a great company and a foundational technology company, actually can't
command.
That
much of the value
creation uh going forward from computing
And doesn't end up being as good an investment as they expect it to be.

from the academic side of things, it depends how much
ARM is the point of integration. If they're just a component that ships in phones and the real value is created and the phone is the point of integration of hardware, software services and components.
then most of that value accrues to the phone manufacturer, which is why Apple's worth over half a trillion dollars. But to the extent that ARM actually has
ecosystem lock in and and commands a lot of value for doing that.
And in some way they're the point of integration, bringing um
you know, the software developers who are able to
uh write software that gets compiled to run on ARM processors.
with the actual device manufacturers, which they aren't. That that explains why they, you know, command so much less of the value.
There you have it.
We shall see.
We shall see.
Yeah.
This is a fun one.
Thank you, listeners, for
For bearing with us. Uh
I hope we
did justice and communicated, you know, a little bit about the technology, a little bit about the business model.
Hopefully a lot about the story. Uh
But also, you know, why this is uh
No matter what corner of
the technology ecosystem you live in.
This is an important one to understand.
Yeah, and I don't think I really got that until digging in. I mean it was always kind of mysterious to me of like
I just didn't understand why it got bought for so much when
They don't make anything. And it's you know, it's been nice to have an hour and a half to understand that a little bit better.
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