I find the ARM vs. Qualcomm litigation particularly troubling because it looks like ARM is attempting to illegally shake down Qualcomm, which is arguably ARM’s most prolific customer, in order to close a massive cash shortfall. The shortfall was supposed to be corrected by selling ARM to NVIDIA, but that deal fell through thanks partially to Qualcomm’s efforts to stop it. The NVIDIA deal was perfect in that it gave Softbank, which owns ARM, a significant amount of cash, and it would have provided ARM with enough additional money to fund operations and R&D.
ARM Needs Cash (And May Fail Without It)
The IPO, which has been postponed, would have only paid Softbank and would have left ARM in a precarious cash position as an independent company with no parent to call on for funds. I expect this is partially why the IPO failed because institutional investors would have realized they’d be screwed in that deal. Who wants to invest in a property that is nearly certain to fail?
This puts ARM in a bad position. Its parent is cash-poor, it has no easy way to raise billions of dollars outside of the now postponed IPO, and its business model is beginning to look like it is about to fall apart because ARM still doesn’t have the operational capital it needs and no fast way to get it. So, ARM decided to sue Qualcomm in the hope that Qualcomm will close this financial shortfall. ARM’s lever is to create so much FUD over Qualcomm’s processors that it will hurt Qualcomm’s sales and force it to pony up more money. This looks and reads like external extortion, and I have a hard time believing a judge won’t see it as a blatantly illegal attempt by a European firm to abuse a U.S. company.
All those dynamics pretty much assure that unless Qualcomm decides it is worth the money to stop the threat to its brand and sales (to give in to extortion, in other words, which every CEO I’ve ever trained with knows not to do because then the other company owns you), ARM is going to most certainly lose this effort. So why would it do something so stupid?
Dunning-Kruger Effect
Over the decades as an analyst both inside and outside of companies, I’ve observed a recurring trend I now credit to the Dunning-Kruger effect. The Dunning-Kruger effect postulates that the less someone knows about something, the more confident they are about doing it. The recurring mistake I’m referring to is the belief that you can use litigation as an offensive, rather than a defensive, weapon. The less legal experience the person making the decision has, the more likely they are to decide, when they are in financial difficulties, to use litigation to try to correct the problem, not realizing that litigation works very poorly offensively unless you are a litigation expert.
The reason patent trolls are effective with this kind of litigation is that they tend to be focused law firms and they don’t build anything which severely limits the company being attacked from responding in kind. What makes the difference is that a patent troll company was built to litigate while a company like ARM is built to develop and license technology. While litigation experts run patent troll companies, knowing and caring little about how to use the technology they own but knowing a great deal about how to use the courts, companies like ARM are typically run by engineering types who are focused on legitimately building, maintaining and advancing technology that is licensed to customers to help them.
When you use IP litigation offensively, you will typically run up against law firms that are experts on defense, which is where most firms that have IP assets spend their money. So, you have a firm on the offense that doesn’t really know how to play offense because, unless it’s a patent troll, it has developed that offensive capability going against a defensive team that has likely defended against patent trolls and could be considered an expert on defense. This would be like someone that watched tennis a lot deciding to play a competitive game against a ranked player.
Putting contract issues aside, the reason ARM won’t win this is because it’s overmatched largely because it didn’t realize it was overmatched and thus took a path it shouldn’t have traveled.
ARM’s Downside: Collateral Damage
This litigation has a lot of people looking closely at ARM and its billions-of-dollars shortfall. They’re also seeing that the IPO, whenever it occurs, will likely leave the company worse off and effectively doom the IPO or force a change that will put more of the money raised into ARM’s coffers (so they have the needed operational funds), not Softbank’s where the money is currently expected to go. It comes at a time when RISC V is rapidly rising in popularity due to its far more favorable and forward-looking licensing model, and it makes ARM appear to be a hostile and unreliable partner that will attack its licensee’s revenue sources if that licensee doesn’t capitulate to its unreasonable demands. No one smart is going to want to license from a company that appears to be both acting punitively against licensees outside of the legal process and that believes it can unilaterally change pricing terms outside of a contract renewal process.
As we watched the FTX collapse and both Meta and especially Twitter drifting towards failure, it is becoming increasingly evident that ARM may be the next on this list of soon-to-be-failed companies. That is hugely beneficial to RISC V and the X86 ecosystem (Intel/AMD) and takes ARM further away from financial stability and independence.
Wrapping Up: ARM RIP
The lesson here is that unless you are a patent troll (and I would advise against becoming one), using litigation offensively is a bad idea. It makes you look weak, the expertise dynamic places a historically weak offense against a historically strong defense, and the collateral damage to the firm bringing the litigation can be terminal, particularly if that firm lives off of licensing and now appears to be attempting to abuse the power its IP may grant it.
Were I Qualcomm, I’d be making a plan to migrate to RISC V as a hedge against the ARM attack, and the risk to ARM is that the team doing this may find they can exceed ARM performance at a lower production cost. This will drive Qualcomm and the massive number of companies who license and buy from it to make the switch as well. There is no doubt that Apple, which has always overly focused on margins, is watching this as well and likely already has a RISC V project internally that no one is yet talking about, as well.
In the end, this may have already gone too far to save ARM, but you can learn from that mistake and recognize that unless you are an attorney specializing in IP law, using your IP offensively will likely, at best, be a waste of money. At worst, it could be instrumental in the failure of your career (if not your firm).
