Acquired - Season 4, Episode 2: ARM & SoftBank

Episode Date: February 3, 2019

We dive into the crazy, little-known story of how this small, former PC-maker in Cambridge, England dethroned Intel, saved Apple from bankruptcy, became the blueprint for the largest investment fund in history, and of course now powers just about every device you use today. From Issac Newton to the Apple Newton, the Vision Fund and beyond, ARM has had an impact on the technology industry that cannot be overstated!Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!Links:The Nokia 6110: https://en.wikipedia.org/wiki/Nokia_6110Fast Company on SoftBank and how the ARM acquisition happened:  https://www.fastcompany.com/90285552/the-most-powerful-person-in-silicon-valley

Because I mean, what's cool is like, it is literally the ARM 610 that was developed with Apple for the Apple Newton is the core of all the ARM processors. Welcome to season four, episode two 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 $32 billion purchase of the British-based Arm Holdings. For folks that listened to the previous episode that we did on SoftBank,

you know they were once a Japanese telecom and multinational conglomerate now that has a close to $100 billion fund that they have created massive disruption in the startup landscape. And here we are diving into kind of the deal that started it all and with just an essential piece 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 we will find out why as we dig in. So if you're interested, or you just want to support the show 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 kimberlite.fm slash acquired. Okay, listeners, now is a great time to tell you about longtime friend of the show, ServiceNow. Yes, as you know, ServiceNow is the AI platform for business transformation. And they have some new news to share. ServiceNow is introducing AI agents. So only the ServiceNow platform puts AI agents to work across every corner of your business. Yep. And as you know, from listening to us all year, ServiceNow is pretty remarkable about embracing the latest AI developments and building them into products for their customers. AI agents are the next phase of

this. So what are AI agents? AI agents can think, learn, solve problems, and make decisions autonomously. They work on behalf of your teams, elevating their productivity and potential. And while you get incredible productivity enhancements, you also get to stay in full control. Yep. With ServiceNow, AI agents proactively solve challenges from IT to HR, customer service, software development, you name it. These agents collaborate, they learn from each other,

and they continuously improve, handling the busy work across your business so that your teams can actually focus on what truly matters. Ultimately, ServiceNow and agentic AI the busy work across your business so that your teams can actually focus on what truly matters. Ultimately, ServiceNow and Agentech AI is the way to deploy AI across every corner of your enterprise. They boost productivity for employees, enrich customer experiences, and make work better for everyone. Yep. So learn how you can put AI agents to work for your people by clicking the link in the show notes or going to servicenow.com

slash AI dash agents. All right, David, I heard a rumor that you have one more thing for listeners. Indeed, one more thing. We passed a million downloads in the lifetime of acquired. Huge milestone. And to celebrate, we are going to do, you heard it here first, a worldwide virtual acquired meetup. So we're going to host this in Zoom. Ben and I are going to be on video and we'll have everybody else in the Slack community. We've got a bot installed that's going to do aggregate AMA questions and we're all going to hang out. So we're going to do it on February 21st, 2019 at 5.30 PM Pacific time. We thought that would give everybody, you know, at least in the US, be 8.30 East Coast, 5.30 Pacific, and it's 9.30 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, it's time. It's time, indeed. Well, today we're going to be talking about ARM holdings, and we're going to go literally from Isaac Newton to the Apple Newton to Masa and SoftBank and beyond. It's quite the scope, man. The first thing for listeners to know before we even dig in here, this chip company manufactures a total of zero chips. And in many cases, they don't even design them either. Yeah. Well, we head to the prestigious and well-known Silicon Fen in Cambridge, England,

home of Isaac Newton, inventor of modern physics at Cambridge University. The time is 1980. And in 1980, in England, the BBC, the British Broadcasting Corporation, which controls 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 computer program on television. Hey, that they show on, um, I think it was on BBC two, uh, to the whole country. 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 micro computers, 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. So this is like a government version of Apple's strategy in the US at the time of getting Apple IIs 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 going to 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 Acorn Computers. But what what who are they? So they started life in Cambridge. I believe they were initially called the Cambridge Processing Company or something like that. 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 and 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 1981, they start shipping it to schools around the country. 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 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 2 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 1981 that was pretty important, turned out to be far,

far more important than the BBC computer program, which was that IBM introduced their first IBM PC in the American market. And the IBM PC was the first personal computer that was... Because remember, computers before then, they were in professional and business use. It was the whole client-server model. It was terminals, terminaling into the servers. Mainframes, all that. Think about 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 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 going to 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 8-bit micro computer like it's a personal computer but it's nowhere near powerful enough to compete with the ibm pc we need to we need to create our professional computer so they start

a project they call it the archimedes project this must be like a legacy of you know cambridge and academia and like having these, you know, scientists 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 processors had really cool names like 6502.

Yeah, super, super super cool i miss that these days yeah i know i know uh although arms naming schemes are are not really much yeah but those end up those don't end up becoming consumer brands the way that like you know a11x or something like that does although a11x we've completely gone back never mind my point is completely destroyed by the fact that apple is calling chips like it made sense when it was like a5 a6 so bionic actually means nothing yeah 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 a10 or a11 it is just a it's kind of like, you know, Mac OS 10.4 Leopard, or I think that's wrong.

But yeah, anyway, too many digressions. Too many digressions. Anyway, so Acorn hears that Intel 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 going to be a 16-bit processor. It's getting a ton of buzz. And this is like a super famous in computer history. This is the 80286 processor, which would eventually become just the 286, which successors would be the 386, 486 and then the pentiums and then every

modern intel chip that we know today this was the first the x86 architecture if you will indeed this is the first of the x86 so acorns 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 going to go down as like one of, you know, there are a few of these moments on Acquired of like, you know, history turns on like a knife point. You know, whether it's Blockbuster 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 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 noticed you said high performance so i think that probably is still true well depends how you define high performance um so acorn they are they're kind of 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 either as interns or full-time staff. And these people are super talented. And they decide, you know what? Maybe we can just build our own microprocessor. We started as a microprocessor firm in another era let's try it again they decide they they give 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 286 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 Intel behind us, what can we do? And so this team led by Sophie Wilson, who was and is an incredible computer scientist, you know, 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 has just come out about detailing what a project would look like for a reduced instruction set computer. Now, this is this is going to be 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 oversimplifying technical details in this episode. 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 going to dust off the computer science degrees here and, and, and, and I would, I would say in, 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 may we be so bold 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 complex instruction set architecture, and even before that, like, what the heck is an instruction set architecture? Like, why are we, why? Okay, so the instruction set architecture,

you can think about as sort of the language of a chip. So a CPU has 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 we can move this thing out of that register and push it off into memory or something like that. All of this happens. This is all what's happening inside the CPU in your computer, whatever device you're using right now. Yeah. And what, at what speed? I don't

know, like hundreds of thousands of times per second or millions of times per second. I mean, this happens incredibly fast, but it requires a language. It's sort of like a, its own programming language. And it's the, the instructions or the instruction set that the chip itself speaks. And so originally, the way that this was done was with CISC. And this was really the complex instruction set computer where 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. And this is like multiplying numbers, dividing, transforming numbers, all sorts of stuff. Right, right. It would sort of do as much as it possibly could using the hardware

circuitry. So it was really about, hey, this is going to be powerful hardware. So we're going to write a language that leverages all the very unique and powerful components that are actually on this chip. It could have, without getting too complex on these things, variable length instructions. So you couldn't rely on a set of assumptions about how long each instruction was going to take time-wise or was going to take up space-wise. So while it provided the programmer with a lot of power, it required a tremendous amount of tight coupling with the hardware and complexity. Yeah. 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, C-I-S-C, complex instruction set architecture computers, that is what Intel processors are. So Intel, like the set of instructions that is CISC comes from Intel and all Intel x86 processors are CISC 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 got to

be cheaper, it's going to be less sophisticated, so there's less components on the chips, there's going to be less instructions that are available for the programmer to use, and really it's not the programmer, it's actually the compiler that available for the programmer to use. And really, it's not the programmer, it's actually the compiler that translates what the programmer writes into 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. 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 addresses and limited number of registers. So in all aspects of it, it's sort of worse. You could sort of describe it as worse in every way, but I'll turn it back to you, David. So how does that actually end up being disruptive and better what one of the team members original team members who worked with sophie on designing this would write later you know you could think of it as it's the 80 20 rule right like these risk reduced instruction set uh architecture the machines uh processors that that acorn designed they were they only could do about 80 percent of the instructions that cisc 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 20%, the chips would slow down hugely. But the thing was, you just didn't do them that much. So like the 80% that you were doing most of the time, like they were really, really good at. You're spending a lot of money to build this sort of 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 famous Intel processor that started the x86 line, the first one of those had about 130,000, 134,000 transistors on the chip. The Acorn processor, the RISC processor, when they finish it, has only about 30,000 transistors on the chip. And yet, because of this 80-20 rule, it actually has better performance than the 2286. 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 going to call this chip the Acorn Reduced Instruction Set Computer Machine, ARM, boom, and the world changes. But not just yet. The groundwork was was laid for the world to change. But it wasn't yet. It's not like, you know, here we are in the 80s, and Intel starts doing poorly. You know, these things take a long time. This is really interesting. So now let's bring, 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 1987 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 RISC architecture computers. So for a long time, for the whole entire PC wave, everybody in the industry knew that other types of architecture, RISC-based architecture, which ARM pioneered, but you know, the Motorola Power PC, like what Apple was using at the time, it was fundamentally better technology. But because of the duopoly between the Wintel duopoly between Microsoft 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 Windows, run DOS on 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 make your programming language, which is written in C and using sort of the standard C compiler, work well across different chipsets, especially when, you know, you have so many layers of translation from the application to the operating system to the kernel, you know, eventually getting, you know, actually executed on a chip. And there's a lot of sort of assumptions that are baked into the programming language to the compiler there's a lot of sort of assumptions that are baked into the programming language to the compiler to the chip, and sort of 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, you know, for a different scenario, a much better instruction set architecture. However, basically nothing would run on it and they needed to kind of think about the world in a whole 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 going to happen during the pc 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 kind of in a bleak position here now. They've put a ton of resources into this new Archimedes project that they think is going to be, you know, they're going to ride this next PC wave. They're getting knocked off the wave. You know, this is probably the end of

the company, right? And actually it is uh acorn itself ends up getting acquired by an italian computer company called olivetti around this time and they end up just exiting the pc business altogether 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 going to cost less. But what it turned out, they would put these processors into the pcs into the archimedes prototypes

it turned out they sometimes would function even without a power supply 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 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 you know 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, 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 cambridge physics phd he leaves and he's thinking which a couple people are thinking 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 a couple years ago like we're in the middle of the next wave going to be this is like you know people thinking about vr right now or a couple years ago like we're in the middle of the mobile wave but like what's next and it's worth sort of like 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 and 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, 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 assistance, which are mobile devices. And what's super important for mobile devices, battery life. So, and this is 1988. This is 1988. So battery life is very important. Right. Very important. I think lithium ion batteries get like 15% better every year. So

compound that back 30 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 they're 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 what was 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 he's like, yeah, we can do that. And,

uh, they do and it works and they start producing these chips with their longtime silicon partner, VLSI. Because again, Acorn didn't have the resources to be manufacturing their own semiconductors at this point. So they used a fabricator, VLSI, to make their silicon. Well, at the same time, who else is thinking about PDAs out there? This is 1988. 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 Scully is CEO and John Scully's, you know, great white whale is the same thing as herman hauser it's the personal digital assistant you know scully 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 workstation come on what's the difference between being wrong and being too early nothing but good for the world that he was wrong and too early because scully puts larry tesler at apple on this newton project which is his his pet project and larry is amazing. So Larry came from Xerox PARC. He was like an OG original computer guy. He invented copy paste. He's like leading the SWAT team within Apple that's going to build this computing platform of the future. He knows he needs a low power, high performance chip.

He first goes to AT&T, which was working on a low-power chip called the Hobbit, which you can't make this stuff up. Just like you would expect from a chip from AT&T called the Hobbit in 1988, it sucked. It was terrible on every dimension. And 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 AT&T and formed the backbone of The Hobbit. Anyway, Larry gets introduced. He's chatting with people in the silicon industry, trying to find better chips. He's chatting one day with 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 kind of 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, 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 olivetti like we're competitors we need

to we need to create a structure that can work here so they architect a deal with olivetti and 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 totally separate company called arm this blew my freaking mind that arm was started as a jv with apple on the new. It's crazy. So Apple invests 1.5 million into the company. So Acorn and Olivetti are bringing the engineering group. They assigned 12 engineers to the new company. VLSI is the silicon fabricator partner. They get an equity stake. Apple brings the money. They get 43% of the company for one and a half5 million. Again, talk about a dilutive seed round.

To blow out the irony of this, I'm going to jump forward just to foreshadow, all of the A-series chips are ARM processors. The thing that is so differentiating about the iPhone, and 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 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 12 engineers, they do the spinoff. They get the one and a half million from Apple. These 12 engineers go down the street in cambridge they shut they set up shop in a converted barn and 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 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 going to work within this small device, the Newton. So they're working hand in hand with Apple to create it. And they make the processor, it's the ARM 610. And that goes into

the Newton and every Newton, the first Newtons that shipped all had the ARM 610 processor in them. And then it would get upgraded over time, but it would power every Newton. Now, ironically, remember Herman Hauser, the original Acorn co-founder who had started ActiveBook and kind of set all these wheels in motion. He ends up selling ActiveBook to AT&T, of all people, in 1991, and AT&T demands, merges it in with the assets of Go that it had acquired, which is now EO within AT&T, 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 these PDAs did end up shipping, but 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 achieve new heights oh man this is so much fun speaking of failure though i mean at&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 what happens to arm post newton failure so when the newton actually gets around to shipping in 1993 it's now been over two years that arms working exclusively with apple um the newton ships and

like it's it's clear pretty early like there aren't going to be enough unit sales here that like the project's like the home pod of pdas yeah it's the home pod of pdas so this is where robin the the ceo from 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 be dependent on just Apple and just Newton to buy a lot of chips from us because they 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 and we 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 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 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, this is like, okay, somewhat interesting. How many devices could potentially ship that are mobile computing devices? So ARM gets paid three times. They get the license fee from, hey, you get to use the ARM technology. 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 manufacturer, or they say, here, you feel like you're a

good designer. And this is sort of how Apple's relationship works today. You use our instruction set 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 unit sold, you know, they get a tiny little piece of the cost of each CPU that 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 100 times bigger than every person in the world combined, which 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? 130 billion. Yeah, that's billion with a B. And that's a lot of pennies. And think about that. Those are ARM chips, each of which is the core processor in a device. So that is 130 billion devices. Not necessarily true. Lots of devices have...

Well, many devices have multiple chips within them. Yes. But still, like, you know, it's a... 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 thoughtful first contract to sign that they get some upside on

units shipped. Yeah. And what's also cool. So again, like I think this is such a cool example arm is 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 the 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 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 exactly oh man incredible is that pci express right yeah that was the that was a 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 arm's 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 57, you know, bionic Superman chip. Um, that's what this is. Uh,

all the Samsung chips, Qualcomm chips, TI chips, like every, you know, chip, 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 two system on a chip, which is, you know, where we are today. Yep. And so actually that same year in 1993 and like, again, so much kudos to Arm the company and to Robin, ceo for turning this around the same year that the newton ships and they realize this isn't going to work they sign a landmark deal with texas instruments to provide the core of a processor that nokia has contracted with ti to go into the nokia 610 or 6110 we'll try and put a link to this in the show notes once 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, certainly in America 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 ARM chips were, you know, even though they were better in a lot of I'm sure everyone played Snake on is nothing like the software that ran on Macs or on Windows. Snake was like the killer app because ARM processors were literally like before the Nokia 6110, 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 it felt more like an embedded device than really like phones as we know today.

And phones today 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 macOS. And people always harp a lot on this like strip down macOS to create iOS, and it still uses the same 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 these mobile phones was adapting it for the ARM chipset. Like, to bring PC operating systems to something that would operate on these chips that, like, weren't getting a lot of power and had, you know, completely different instruction set. The fact that 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 it'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 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 but last couple years at the you know as smartphones were taking on 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 10 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 to port into the x86 Intel with OS X, right? So they were much less wedded to, you know, and open to porting their Mac OS and OS X into different architectures. And indeed, they had this Newton DNA as well.

For folks who don't know specifically what we're talking about, so the iPhone came out in 2007, which, holy God, they put Mac OS on an ARM chip. Two years before that, the thing that we're referencing here is 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, so we're changing the 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 Adelini walked out on stage and,

oh my God, Apple is using Intel. Look at all the old wars that are 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 thing is that that you guys don't even realize it's been that way for a year and all the the operating systems dating back you know a year or two years ago 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 a new computer and all your old stuff will work on it david you're right. I think that that did give them sort of the confidence to say like, well, you know, I guess,

I guess we could start re-architecting our operating system to work on yet another chipset. 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 2006, right? When that happened. I wonder how similar those efforts were. Yeah well anyway to rewind back to arm so this is happening uh they do this ti deal the nokia 6110 launches things are all basically up into the rate indefinitely from then uh for arm so at the end of 1997 Arm is doing over 25 million pounds in revenue, and they're profitable. They do a dual IPO, both on the London Stock Exchange and the NASDAQ, because remember, they have British shareholders, Italian shareholders, and an Apple, American shareholders.

On April 17th, 1998, they priced the IPO at five pounds and 75 pence per share, which translates to a market cap of 264 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 so awesome. I can't believe this is going to 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 1998. Steve Jobs had just come back into Apple. Scully was ousted. The company is 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. 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 they start liquidating the arm shares and thankfully they don't liquidate all at the ipo they start selling slowly over a couple years as the arm stock price is going crazy apple remember they invested one and a half million they make 792 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 analyst like now there's a 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 Steve was preparing what would become the iMac 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 2001 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 2002 they pick back up to the point where in 2010, arm is now arm partners are now shipping over 5 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 sensors and devices, anything that needs a low power, high performance embedded processor. All right, listeners, our next sponsor is a new friend of the show. Huntress. Huntress is one of the fastest growing and most loved cybersecurity companies today. It's purpose built for small to mid-sized businesses and provides enterprise-grade security with the technology, services, and expertise needed to protect you. They offer a revolutionary approach to managed cybersecurity that isn't only about tech. It's about real people providing real defense around the clock. So how does it work?

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and respond to threats with unmatched precision, head on over to huntress.com slash acquired or click the link in the show notes. Our huge thanks to Huntress. So, typically this would be where we would, you know, wrap up our history and facts.

Companies just growing nicely. However. It's post IPO, you know. Yeah, you know, we'd grade the IPO. We'd say like, man, you know, if only Apple had hold onto their shares and didn't need to liquidate. It's kind of crazy.

I'm not sure we would be doing this episode if SoftBank hadn't bought them, because it is sort of like, if you've bared 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 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 large component of their business that is just licensing the instruction set architecture. Like. They have now managed through the value 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 licensed their instruction set, and it means they get a cut of all chips that are manufactured using their IP. And that sort of continues to blow my mind that somebody doesn't say like, sorry, that's not your lunch. 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 35 cents per unit. It's something like one to 2% of the chip selling price, depending on which of their business models it was manufactured under. But like $0.35 of every A-series chip, why is it that they've managed to hold on and actually get a cut of every single chip manufactured? I think it's probably two things. One, they continue to have truly excellent processor and chip 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 the same reason why the Wintel duopoly existed, right? Even though Apple is more flexible about moving architectures than Microsoft was back in the day, Android and iOS run on RISC architecture chipsets. Are they really going to re-architect them for something else? 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. So Apple does a lot of this anyway. Like Apple's one of the companies that actually could probably uniquely do it because 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 xcode make it so that every app that's

that's compiled just works on their new chip set that's not arm based that they launch just like they did with intel back in 2006 right and it wouldn't surprise me because they've they've taken over not only their own i mean they don't manufacture their chips but they design their own chips 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 going to 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 positioned to be the only company to do it because google's not going to do it with android because android is a diverse ecosystem you need arm to be the architecture to be the standard across the chip you know ti 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 little bit worse of a position than microsoft because you can't guarantee that it's an intel chip it's probably a qualcomm chip but it could be a bunch of things well all right so to pull back from tech themes back to our story let's talk about the actual acquisition because that's the name of the podcast this is like such a um such a schizophrenic episode because until now i keep pulling us into the future this is so important this company in this technology and i hope we've done a 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 softbank and masa okay so this brings us to 2016 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 about 1.6 billion in revenue the previous year yep the stock price price is having a huge run because the financial community is starting to wake up to this fact. They're like, oh, hey, if I want to ride the mobile wave

and I want exposure to this, ARM is like a really good way to do it. Yep. We shipped 15 billion units in 2015. 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 masa and softbank that just came out we know what happens

here so it's summer of 2016 and masa 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 80. 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 Masa has like an equally amazing compound there he's hosting a dinner one of the attendees at the dinner is simon sagars who had joined arm back in 1991 right after the spin out he was an engineer and he was the 16th employee at this point he's risen through the ranks over the years he's become the ceo and he's kind of like you know his job is like steward of this ecosystem and like obviously everyone uses arm but like softbank 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 Masa 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 Masa'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 masa's like hmm interesting uh so then masa asked him what you know now has famously become 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 moss is like hmm okay so simon goes back to cambridge back to the UK, to Arm, very different from the environment he was just in. He's sitting there a couple of days later back in Cambridge and he gets a call from Masa in Tokyo.

And in typical Masa 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. And this is the best part of David's reporting here. This is great. Well, we alluded to this in the carve-out 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 Mazza does it like yachts in the Turkish Med.

That's his ballgame. That doesn't faze him. He's mid. Like that's, that's his ball game. Like that doesn't phase him. He's like, okay, well, you know, uh, hang on. I'm going to call him. He calls him and he's like, uh, I need you to dock your boat in Marmay, 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 marme i think i don't know if it's marme french pronunciation or marmese 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'm going to offer you $32 billion, which was almost a 50% 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 20, 25%. We've seen up to 30% in more typical situations. But I think it's a 43 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 it closed it in two weeks yep they closed into they announced uh they got board approval and they announced within two weeks arm to closed into they announced uh they got board approval and they announced within two weeks arm to remain an independent division within softbank softbank's gonna pay

32 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 it was this model i'm sure masa was already starting to think about the vision fund but this deal and this 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 2017 when when they actually get the fund set up, SoftBank Corporate sells a 25% 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 Masa was always thinking about this as an investment.

It was just that before the Vision Fund, the only way he had to invest was through SoftBank balance sheet. Yeah. I mean, now there's a ticking time clock because the Vision Fund has a 12-year fund lifetime. So it's not like he can hold it indefinitely now. Like at some point, they have to either sell that back to SoftBank, which I'm sure Masa 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 transfer, the 25% transfer into the Vision Fund is re-IPO it it i think that's the most likely outcome but what's interesting and this also speaks to the vision fund strategy so in 2016 when softbank acquired the company there were only about 4 000 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 96 percent market share of all smartphone and embedded devices embedded devices that's not a lot of people in the you know two plus two and a half years since then arm has hired

over 2 000 people so they've grown by more than 50% 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 masa 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 that that. Their operating margin was 52%. Their operating margin at the time of acquisition, their operating margin now is 24%. Even though they've grown from 1.6 billion in revenue

to 1.8 billion in revenue, their EBITDA dropped 40% despite the revenue increase. So I'm not sure if they're losing money, but that's interesting. They're selling a lot more devices. They're only make a little bit more money and their profits significantly dropped. Hmm.

Interesting. And their margin dropped. I just pulled it up again. I said, there's an article that they posted a loss of 200 million in, I believe, 2018,

which could be for lots of reasons. Obviously, that's not operating margin. That's net income. The drum that they're beating and telling investors right now is, hold on, guys, we are way investing in growth and it will pay off. And then we're going to do something about it when it does. And what's interesting, 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 designs and devices chips that are dedicated for ai use cases but also for like autonomous vehicle use cases so you think about you know vehicle use cases. So you think about, you know, Intel bought Mobileye for, I think, $17 billion. And Mobileye makes chipsets for cars, and in particular for computer vision for driver assistance, and eventually, fully autonomous 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, as well as all sorts of, you know, embedded computing. Yeah, it's interesting, because the stated reason at the time of purchase, and at some point here, we'll breeze through the other sections of the show. But at the time of purchase, the the drum they were beating was its IoT, that the Internet of Things is blowing up. And because you know, there's going to be an ARM device and much more than your phone, it's going to 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 masa 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 going to 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 devices shipped has continued to be a really great story. They went from, I think, 2015, they were 15 billion, and now in, I think, at the end of 20, when was this? 2017, they did over 21 billion. Yeah, that's what I'm looking at too.

Their exponential growth continues to be really excellent, but it is interesting.'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 it's funny i'm in the latter camp but should we jump to acquisition category yeah it's so funny you know we were setting this up all along for an ipo narrative but boom acquisition because we've done so many recently uh now business line for sure

not even yeah no 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 happen otherwise? Like, you know, this is an interesting one. 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. 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 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 $10 billion of Alibaba shares and $7

billion of Supercell shares, plus they took a $9 billion loan. And SoftBank does this pretty often. I think they take out these big, big credit lines to do deals like this, which makes a lot of sense why you would switch to 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 you? I like this arrangement. It's kind of like the ESPN deal. It is business model innovation all over the place here at Acquired. Yeah. So my sort of theme of this section is interesting to look at the conditions upon which the deal got done. 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 would have been value destructive. Because if you sold to Apple, then Qualcomm's freaking out that they're not going to have access to their core technology anymore. And same thing in the other direction. of possible purchasers who have $30 billion or who can raise $30 billion that are willing to plow a bunch of future investment into your business that aren't strategically or, I guess, structurally sort of corruptive to where you want to operate in the market in a value-destructive way? Pretty limited. I would say it's fortunate and and value creating for the world that it landed where it did well 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 20 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 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

Masa'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, and listeners, we appreciate all this feedback, that we do a lot of 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 4,000 really brilliant physicists and PhDs and chip designers and computer scientists and technologists, if you believe that funding them, they'll continue to produce IP that will enable us to have continued innovation and do things that we previously

didn't think possible because it would produce too much heat or 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. Totally. It's very much a you get the investors you ask for. There's a very reasonable chance that the public market was not a good place to, you know, to go stand on that hill and say, we're going to be, we're going to 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 yep

uh should we move into tech themes officially yeah let's do it finally i've got two which i know i've been beating this uh drum for a while one is just like this alignment 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 its involvement here, you know, it is the, the marriage of technology and the liberal arts, uh, when you can do that. So that's one, the other one that 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 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 spinoff was getting started and 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 PCs and it's the Microsoft Intel Wintel duopoly is getting started. This company is dead in the water. 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.

Now, of course, that means that 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 10 years where it looks like there's no growth in 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 6110 within three years of the spin out. So like the devices weren't shipping yet, but they were, they knew it was coming yep it'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 SoftBank acquisition. Let's paint the A-plus scenario and the C or C-minus scenario over the next five years. All right, so I'll start with the A-plus. If you believe in the thesis that David and I chatted about on the LP show that ambient computing is the next computing wave. So to sort of review the, there was PC, and that there was a trillion dollars in that ecosystem of value created. Then there was the internet and then mobile, and sort of what is that next thing?

And what is that next wave of computing upon which platforms will be built that, you know, that enable entirely new use cases, new companies, and a new way that people interact with technology, and ambient computing is that thing, they're probably all going to have ARM chips in them. Be it the AirPods that Dave and I are both wearing now or the watches that I think we're both wearing now, or as our friends on the team that work there say,

the lady in the tube that will respond to my voice when I get home. All the way down to sort of the litany of things that used to 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 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 let's review that real quick. The $32 billion was bought for 18x earnings and 29x EBITDA. So already a fairly expensive stock. But yeah, it still feels like a good buy if you believe that we're going to transition from sort of 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 arm 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 case 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 four quarters, so the trailing year of revenue, was $1.8 billion. So SoftBank bought the company for $32 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 IRR 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, 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 have 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 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 going to be something else to the proliferation of devices and make ARM sort of look like the old grandpa technology? Like, is there some significantly lower power thing that, you know, literally just needs the vibrations of the EM spectrum in the air to

power it or something really crazy now 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 risk architecture but again if you look at their financial results like the fastest growing portion is software and services right this sounds like sounds like the Apple narrative, right? Of like, you know, all is well, even though our, you know, core business is flat to declining, like we're making it up in services, like that's not as defensible. So, you know, I think that's 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 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 commands a lot of value for doing that, and in some way they're the point of integration, bringing the software developers who are able to write software that gets compiled to run on ARM processors with the actual device manufacturers, which they aren't, that explains why they command so much less of the value. There you have it. We shall see. We shall see. Man, this was a

fun one. Thank you listeners for bearing with us. 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, but also, you know, why this is, 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. They weren't making

the chips. And it's, you know, it's been nice to have an hour and a half to understand that a little bit better. We want to thank our longtime friend of the show, Vanta, the leading trust management platform. Vanta, of course, automates your security reviews and compliance efforts. So frameworks like SOC 2, ISO 27001, GDPR, and HIPAA compliance and monitoring. Vanta takes care of these otherwise incredibly time and resource draining efforts for your organization and makes them fast and simple. Yep. Vanta is the perfect example of the quote that we talk about all the time here on Acquired, Jeff Bezos, his idea that a company should only focus on what actually makes your beer taste

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