How did Arm and Qualcomm's 'symbiotic' partnership go south?

Arm Holdings (ARM) has reportedly given Qualcomm (QCOM) a 60-day notice of termination for its architectural license agreement. Moor Insights & Strategy founder, CEO, and chief analyst Patrick Moorhead joins Market Domination Hosts Julie Hyman and Josh Lipton to explain the complicated relationship between the chip-related companies and what he expects in the pair’s ongoing dispute.

Moorhead says “Qualcomm and ARM very much have a symbiotic relationship. Qualcomm is likely Arm’s largest customer. Having a supplier suing its biggest customer, it's a big deal.” He explaining the licensing dispute “goes back years and years ago where Qualcomm used to have an architectural license from Arm where they would develop and design their own chips, very similar to what Apple (AAPL) has today. And then there was a period where Qualcomm licensed design more on a royalty basis, more fit-for-purpose designs. And then, a few years back, Qualcomm bought a company called Nuvia... and that had a certain license agreement with it.”

“What the two companies are debating here is which of the license agreements goes into effect right now. Is it the one that was with Nuvia? Or is it the agreement that it had prior with Qualcomm? And obviously, Arm thinks it's the larger number on the architectural license, and Qualcomm, they believe it's the smaller of those numbers.”

Moorhead expects the feud will be settled out of court, though a court date is set for December 16. “None of these companies want to take this to court… This is not good for the industry. Their customers don't don't like this.” The analyst says that if the feud persists, it could push customers to competitors like Intel (INTC) and Advanced Micro Devices (AMD).

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This post was written by Naomi Buchanan.

Video Transcript

Arm holdings reportedly canceling a Qualcomm chip design license.

That's according to Bloomberg, the feud between these two companies escalating, driving a rift between these longtime partners and we're looking at the rising competition in the uneven chip race with more insights and strategy founder, Ceo and chief analyst, Patrick Moorhead, Patrick, it's always great to have you on the show.

Uh Maybe start here, Patrick when you think about this arm Qualcomm relationship and and not everybody follows it as closely, you know, these were close partners, but talk about how it has evolved and how is, how is it shifted, why it shifted Patrick and how we end up at this place we are now.

Yeah.

So Qualcomm and Arm very much have a symbiotic uh relationship.

Uh Qualcomm is likely arm's largest customer.

So having a, having a supplier suing its biggest customer.

It's a big deal.

This goes back years and years ago where uh Qualcomm used to have an architectural license from arm where they would develop and design their, their own ships very similar to what Apple has today.

And then there was a period where Qualcomm licensed uh design more on a royalty basis, uh more fit for purpose designs.

And then a few years back, a Qualcomm bought a company called Nuvia uh which had in it a bunch of uh ex Apple Bionics, arch bionic architects and designers, the ones who, you know, made the uh bionic and Bionic Pro architecture and that had a certain license agreement with it.

And what the two companies are debating here is which of the license agreements uh goes into effect right now?

Is it the one that was with Nuvia or is it the agreement that it had prior uh with, with Qualcomm?

And obviously arm thinks it's the larger number uh on the architectural license in Qualcomm.

Uh They believe it's the smaller uh of those numbers who Patrick, obviously, this is very thorny and as you say, complicated because these two companies are intertwined.

So what do you think happens and, and sort of how do they move ahead from this?

So I do believe that this will be settled out of court uh even though there is a December 16th court date, which by the way, uh aligns very much with this two month, pull the plug on the arm license with, with Qualcomm.

But II, I believe none of these companies want to take this to court.

Uh Both of these companies uh have a very high proportion of lawyers to employees, right?

They both architectural do architectural licenses.

Uh Qualcomm is very adept.

In fact, Qualcomm had a multiyear legal battle with Apple.

And uh it is one of the only companies that Apple has lost to related to a licensing uh type of dispute, but this is not good for the industry.

Their customers don't, don't like this.

And our e essentially what this could do on the PC side is push customers to the X 86 competitors, uh Intel.

Uh and, and A and D so I think it's in both the company's best interest to settle.

Now, this is not a trivial matter, right?

We could be talking about millions of dollars over over a few years.

50% of arms revenue is licensing, 50% of its revenues are, are royalty.

So, from a profit basis, uh I, I would say that this is a bigger deal to arm than it is to Qualcomm and don't get me wrong if they pull the license and want all of this intellectual property destroyed.

Uh That is an entirely other matter, but I just don't think it will, it will come to this, this, this will be settled outside of court.

And so to, to just put a button on that Patrick, you, you, you would guess happens here, new negotiated license and presumably new higher royalty rate for Qualcomm, right?

And, and I don't think this hits Qualcomm's PNL though it hit, it hit a future uh PNL.

Uh But right now, you know, Qualcomm is, is paying armed based on the license agreement uh uh that they had, I think the thing to keep in mind is that uh if you look at the competitiveness of, of Qualcomm chips, I I see them gaining market share with this new Snapdragon eight elite and Qualcomm is nowhere to go.

But up to go in the PC market, uh they might be a half a percent market share, 1% market share, but I believe their goals are into the deep double digits.

So uh you have to look at all of these different factors as investors uh weigh the puts in the takes of what this means.