Acquired - ARM & SoftBank

0:00Because 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 4 episode 2 of acquired the podcast about technology acquisitions and IPOs. I'm Ben Gilbert. David Rosenthal. And we are your hosts. Today we are going to explore a topic that is flown relatively under the radar despite being...

0:40the primary component of every single one of our phones. SoftBanks $32 billion purchase of the British-based arm holdings. For folks that listen 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...

1:04it 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.

1:18Listeners, 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.

1:44So 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 kimberlight.fm slash acquired. All right, listeners. Now is a great time to talk about a new partner of ours here on acquired, LaGora, the agentic operating system that is redefining how the world's best legal teams work.

2:10Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Lugora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm.

2:36for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legora's bed here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

3:05And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting the early LaGora numbers essentially.

3:33speak for themselves, when they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1200 legal teams in 50 countries, and crazily, they went from 1 million to 100 million in ARR in about 18 months. Truly insane numbers, and that is the real test.

3:58Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company, you can learn more at logora.com slash acquired and just tell them that Ben and David sent you. All right, David, I heard a rumor that you have one more thing for listeners.

4:23Indeed, 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.

4:59PM Pacific time. We thought that would give everybody, you know, at least in the US be 830 East Coast, 530 Pacific, and it's 930 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.

5:28to 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 Fan in Cambridge, England, home of Isaac Newton, inventor of modern physics at Cambridge University.

5:57The 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 as 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?

6:43the computer program on television. That they show on, I think it was on BBC two 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 through 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 twos into schools so that kids can learn and play on computers with the idea that like eventually they'll grow up and then keep using Apple as they grow up. Google strategy today with the Chromebooks. Indeed. That I think is working really well. Yeah, I think so too.

7:28The 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 who are they?

7:53They started life in Cambridge. I believe they're 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, like the Apple too. And supposedly, they chose the name Acorn because It sounded like Apple, but it was ahead of it in the telephone dictionary. So when people were looking up computer suppliers in the telephone directory, they would see a cord before Apple. Maybe that's how they won the bid. So they win the contract and they get to work on the device. They're hard to work at it. They know this is like a huge opportunity for the company.

8:39In 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 and computing history, like literally a whole generation of British kids grow up with this as their first 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 too was on sale for over 16 years and only sold 6 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

9:37And the IBM PC was the first personal computer that was, because remember, computers before then, they were like 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 the Apollo program on. It wasn't personal computers. So when IBM introduces the PC and it's targeted at business and professional users, this is really 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 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

10:35micro 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. It must be like a legacy of you know Cambridge and academia and like having these you know a scientist and mathematician names they realized though the processor that they'd been using in the BBC micro they hadn't designed it. It was an off the shelf.

11:058-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 cool. I missed that these days. Yeah, I know, I know. Although arm's naming schemes are hard.

11:22Not really much better. But 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 and 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 Mac OS 10.4 leopard, or I think that's wrong, but yeah. Anyway, too many digressions. Too many digressions. Anyway, so eight corn here is that Intel, often California, they're a processor company, everybody knows about it at this point. They are working on the perfect processor.

12:15that 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 it is, this is like a super famous in computer history. This is the 80-286 processor, which would eventually become just the 286, which successors would be the 386, the 486, and then the Pentiums, and then every modern Intel chip that we know today. This was the first of them. The X86 architecture, if you will.

12:42Indeed this is the first of the x86 so eight corns like oh cool like hey Intel like we want to you know be a customer to you guys can you like? You know ship us over some so we can build some reference you know PCs and Start working with you guys And for some reason, and this is gonna go down as like one of, you know, there are a few of these moments on acquired of like, you know, history turns on like a knife point, you know, whether it's blackbuster 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 Cambridge, you know, England, not even Cambridge, Massachusetts, like,

13:26We don't care about you guys. Surely nobody will ever decide to do something on their own when we tell them no, and then eventually lead to our own demise. We're Intel. Who else is going to make high performance computing microprocessors in the world except us Intel? I notice you said high performance, so I think that probably is still true. Well, it depends how you define high performance.

13:53They'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.

14:11physicists and engineers and early in the burgeoning field of computer scientists, students from Cambridge University, where they're located that they've employed, you know, either as interns or full-time staff. And these people are like super talented and they decide, you know what, maybe we can just build our own microprocessor like we started as a microprocessor firm in another era. Let's try it again.

14:37They decide, 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, with Intel's 286 chip. We need almost that good level of performance, but it has to be super low cost because we're making this ourselves. 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. One of the most important 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 just came out about detailing what a project would look like for a reduced instruction set computer. Now this is going to be a technical interlude but it's super important to understanding

15:34Again, what becomes probably one of if not the most important underlying technology company for the whole industry right now. 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. I would say in true, you know, Apple.

16:11Fashion here, this show is, and really the whole technology industry is the intersection of, you know, engineering and the level of technology and the liberal arts. And that's what this is here. You're about to get a dose of technology. May we be so bold?

16:25Before we dive into what is a reduced instruction set architecture, it's worth diving in what came before it, the complex instruction set architecture, and even before that, like, what the heck is an instruction set architecture? Like, why, 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 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 at what speed? I don't know.

17:22Hundreds 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 its own programming language, and it's the instructions or the instruction set that the chip itself speaks. And so, originally, the way that this was done was with SISC, 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.

18:04Right, 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 two 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

18:49At 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 SISC CISC complex instruction set architecture computers, that is what Intel processors are. So Intel, like, the set of instructions that is SISC comes from Intel. And all Intel X86 processors are SISC.

19:17complex instructions that 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 translates what the programmer writes into the instruction set.

20:02But 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 are 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 world, right? Like, these risk-reduced instructions at architecture, the machine's processors that Acorn designed, they were

20:55They only could do about 80% of the instructions that CISC could do, but they did those instructions and they executed them much, much faster, like on one clock cycle instead of multiple clock cycles per instruction. So when you needed to do...

21:10those 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.

21:30To 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 8-quarn processor, the risk processor when they finish it, has only about 30,000 transistors on the chip. And yet, because of this 8020 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 hugely forward in engineering and computer science. So they do this. So if you 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 arm boom.

22:21and the world changes, but not just yet. The groundwork 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. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done.

22:51But in an AI first world, that doesn't hold up anymore. Yep, your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote shadow AI running with no security review at all. Right.

23:15And that's where Vanta comes in. They're the leading-agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta agent. Think of it as a GRC engineer, that's governance, risk, and compliance, except that it's software and it doesn't sleep. It finds the issues drafts the fixes and cuts the time that you'd spend on vendor assessments in half. In half!

23:38which is exactly why more than 16,000 companies today run on Vanta. Companies like ramp, cursor, and snowflake all stay audit ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment. And that's the real value.

23:56Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at Vanta.com slash acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you.

24:22This is really interesting. We've just went deep technically on what's going on. There's this huge innovation. Why didn't the first arm chip and the Archimedes that launched in 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 risk architecture computers. So for a long time, for the whole entire PC wave,

25:13everybody in the industry knew that other types of architecture, risk-based architecture, which aren't pioneered, but, you know, the Motorola PowerPC, like what Apple was using at the time, it was fundamentally better technology, but because of the duopoly between the windtell 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 the run Windows run DOS on you know these better chips until recently and there's been a lot of really great advancements in really commercializing this sort of crossover technology recently it was

25:55thought to be basically impossible to make your programming language, which is written in C and using the standard C compiler work well across different chipsets, especially when you have so many layers of translation from the application to the operating system to the kernel, eventually getting...

26:17actually executed on a chip. And there's a lot of assumptions that are baked into the programming language, to the compiler, to the chip, and assumptions around those things being coupled together.

26:31Sort 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. Sophie and team did this amazing thing of coming up 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.

27:01wasn't going to happen during the PC wave because the network effect flywheel was like in full swing at this point. You've got Lotus, you've got all these application providers writing for, as we talked about, writing for Microsoft, which only worked on Intel, so boom, there you go, two multi-hundred billion dollar companies come out of that wave, and Acorn is left in the dust.

27:23As 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 a corn itself ends up getting acquired by an Italian computer company called Olivelli around this time. And they end up just exiting the PC business altogether.

27:51But 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.

28:15ended 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 of first, they were like, this is like crazy. What is they like a ghost in this machine? Like how is this, how is this processor working without a power supply? Was it like what residual?

28:43Well, it was without a dedicated power supply to the processor. And this is crazy, because at the time, CPUs were the most power-hungry components of the whole PC. So 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 Olivelli, 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

29:34a couple of 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 of years ago, like we're in the middle of the mobile wave, but like what's next? And it's worth sort of like 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.

30:00and so Herman's like, you know, I think mobile computing, like everybody's all about desktop PC computing right now, but like, think about everything you could do if you had a computer around in the world with you, like not tether to a desktop. He goes and he starts a company to try and pursue this vision of computing. He calls it the active book company and he wants to focus on making PDAs, personal digital assistants, which are mobile devices. And what's super important for mobile devices battery life. So. And this is 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.

30:46Like, they were back. 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 out. Like, I think I got my first computer at that point. I was like four years old and, uh, It was a massive hunk of metal that sat on my desk and probably used half of the house's power supply. What was the next 86? What do you expect? Yeah, right. Exactly. So Herman, he's focused on PDAs and he's like, you know what I think could make this happen? Is these processors we developed back at ARM?

31:22So 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? Sophie's like, yeah, we can do that. And 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.

32:11So 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 great white whale is the same thing as Herman Halzer. It's the personal digital assistant. Scully gets such a bad rap, but he actually had a vision that very few people in computing did at the time. Not even Steve. Steve was off doing next. He's trying to make a super powerful workstation.

32:39Come 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 Tesla.

32:52at Apple on this Newton project, which is his pet project. And Larry is amazing. So Larry came from Xerox Park. He was like an OG original computer guy. He invented copy paste. He's like...

33:09leading the SWAT team within Apple that's going to build this, you know, 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. Like it was terrible.

33:34on every dimension. And this is fun. I think one of my carveouts 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.

33:57Larry gets introduced. He's chatting with people in the Silicon industry trying to find better chips. He's chatting one day with someone at VLSI and they're like, Hey, you know, we've got this partner, a corn 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, I need to have this right now. So he goes over, he meets with Sophie in 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 a corner in Olivetti like we're competitors. We need to we need to create a structure that can work here. So

34:48they architect a deal with all of Eddie 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 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 Newton. It's crazy. So Apple invests 1.5 million into the company. So Acorn and Olivelli are bringing the engineering group. They assign 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 half million dollars. Again, talk about a dilutive seed round.

35:46blow out the irony of this. I'm gonna 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 parted ways over time, but oh my God, they were actually involved in the founding of it.

36:13It is no overstatement at all to say that without the Newton projects within Apple, ARM as a company would not exist. The phones, 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.

36:35These 12 engineers, they do this spin off, they get the one and a half million from Apple. These 12 engineers go down the street in Cambridge, they set up shop in a converted barn. And they bring in this guy, Robin Saxby, who had been an executive at Motorola, to be the CEO of the new company.

36:54get 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 chip set 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 Newton's that chips all had the ARM 610 processor in them. And then it would get upgraded over time, but it would power every Newton.

37:24Now, ironically, remember Herman Hauser, the original Acorn co-founder, who had started active book and kind of set all these wheels in motion, he ends up selling active book to AT&T of all people. In 1991, AT&T demands merges it in with the assets of Go that it acquired, which is now EO within AT&T. Only they could do something like this. They forced it to start using the Hobbit processor. And of course, I don't know, I think I think these, these PDAs did end up shipping, but like they were so bad and it completely fails in the market. David, the rabbit holes that you went down for this episode, I believe achieve new heights. Oh, man. This is so much fun. Speaking of failure, though, I mean, 18T was like obviously stupid with, you know, the Hobbit processor 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.

38:22fails 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. The Newton chips and like it's it's clear pretty early. Like there aren't going to be enough unit sales here that like The project is like the home part of PDAs. It's the home part of PDAs. So this is where Robin, 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 one something.

39:16magical happens. And so what did Robin do? He was like, okay, well, we need to work with other partners here. We can't be dependent on just Apple and just Newton to buy a lot of chips from us because they're not gonna, they're not gonna pay us a lot in licensing fees here. But he's also realized that like part of the magic of what made this process or really work wasn't just that like arm design this chip and like handed it over a whole cloth to Apple, it was that they really embedded with the engineering teams on the Newton and made something like pretty customized that worked specifically for this device. And so he's like, you know, I bet we could do this with lots of people. 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

40:14is 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 our engineering time for embedding with you. And we'll make money on that. But let's align, get aligned on actually shipping units. We want you to ship a bunch of units. We want you to ship a bunch of units. So how about we take a small royalty on every device you ship that has our technology in it and then the time like this is like okay somewhat interesting like how many devices could potentially ship that are like mobile computing devices. So arm gets gets paid three times like they get the license fee from hey you know you get to use you know the arm technology you know our our this instruction set architecture is one that you have the privilege of using on your chip and there's sort of two ways that that can work either.

41:10they 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 and 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.

42:09Yeah, that's billion with a B. And there'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.

42:31But 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 your shift. Yeah. And what's also cool. So again, like, I think this is such a cool example arm is of technology and business model.

42:55playing together and making each other better. So obviously there's the financial aspect of this. What's interesting on the technology side, too, because Arm now, all the other chip companies take Intel, for example, they're like, you know, Adam 7, whatever chip or core, blah, blah, blah.

43:13I 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 and this model that starts to enable systems on a chip to be 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, well, I remember plugging all this stuff in and building my own PCs back in the day. Yeah, man, I heard all in your PCIe slots and colleagues. Exactly. Oh, man. Incredible. Is that PCI expressed right? Yeah, that was the, that was a lot of 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

44:11put all of that just on one chip instead of having separate chips and buses and motherboards and whatnot. Arms like, yeah, cool. Like, put our processor in one chip as part of it. Like, we'll help you with that. And so, Apple, now with the core, you know, the A57, you know, Bionic Superman chip. That's what this is. All the Samsung chips, Qualcomm chips, TI chips, like every, you know, 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 discreet 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 the CEO for turning this around.

45:01The same year that the newtonships 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 you see this phone, you are going to remember this phone. This is like, I think the first cell phone I...

45:26had 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.

45:44David was talking earlier about why these armchips were even though they were better in a lot of ways, they couldn't penetrate the duopoly of Microsoft and Intel and Windows running there. You can start to see now.

45:59you know, the software that ran on that Nokia phone that I'm sure everyone played snake on is nothing like the software that ran on Macs or on Windows. Snake was like the killer app because because farm processors were literally like before the 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 farm build to clash, you know, clash of clients to everything. Right. The bridge that hasn't gotten crossed yet is how we went from that, which really, I mean, that phone felt more like an embedded device than

46:41really 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 Mac OS. And people always harp a lot on this, like, strip down Mac OS 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.

47:09to bring PC operating systems to something that would operate on these chips that weren't getting a lot of power and had completely different instructions 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 put two and two together till right now, but I strongly suspect, if you think about it, 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

47:49points that Microsoft had Windows Mobile, right? And Microsoft had Windows C and embedded Windows and whatnot, right? But like, those were... Completely different codebase. Completely different codebase, 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.

48:12I mean, they do now. They do now, but last couple of years. As smartphones were saying, why could Apple do this? Apple had always been much more open about their architectures that Mac OS ran on, that OS X ran on, right?

48:31Oh, did they already do the transition from the Motorola processors, the Motorola power PCs to, well, they had, yeah, they had to pour it into the X86 Intel with OS 10, right? So they were much less wedded to, you know, and open deporting their Mac OS and OS 10 into different architectures. And indeed, they had this Newton DNA as well.

48:57For 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 Adali walked out on stage and, oh my God, Apple is using Intel. Look at all the old wars that are still, the ground is

49:38burning from all the carnage and wreckage of those old wars. And here's what's happening now. And Steve, of course, says, and the crazy thing is that you guys don't even realize it's been that way for a year. And all the operating systems dating back, you know, a year or two years ago, it was multiple years, yeah.

49:54Yeah, I have been capable of doing this. And you guys just didn't know it. So go buy yourself a new computer and all your old stuff will work on it. David, you're right. I think that did give them sort of the confidence to say like, wow, you know, I guess we could start re-architecting our operating system to work on yet another chipset. Well, 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.

50:23interesting. Well, anyway, to rewind back to ARM, so this is happening, they do this TIDL, the Nokia 6110 launches, things are all basically up into the rate indefinitely from then 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 in Apple, American shareholders, on April 17, 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 gonna be like a footnote in this episode, but like,

51:22I want to highlight here, this saves Apple. The RM 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 asted. 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 RM. No, no, no, they start liquidating the RM shares. And thankfully, they don't liquidate all.

51:51At the IPO, they start selling slowly over a couple of years as the arm stock price is going crazy. Apple, remember, they invested one and a half million. They make $792 million in profit from selling their arm stock over the next couple of years. And literally, that is what saves the company.

52:10It would have gone bankrupt without that. Imagine being an analyst. Now there's an army of Apple analysts, but then imagine being an Apple analyst and you're like, 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.

52:35what would become the iMac and consolidating the product lines and ironically killing the Newton. So when the tech bubble bursts, 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, ARM's partners are shipping devices. So, these aren't just, of course, cell phones. These are microwaves. These are refrigerators. These are cars. 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.

53:31Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part. Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like the risks are real.

53:58Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower. Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place. And ServiceNow can do this.

54:27because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approval, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security. Service now already runs more than 100.

54:45billion workflows annually, and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates. And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all? So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. So typically this would be where we would, you know, wrap up our history in fact. Companies just growing nice. However, IPO, you know, yeah, you know, we'd we'd we'd grade the IPO. We'd say like, man, you know, if only Apple had hold on to their shares and didn't need the liquidity, like, it's kind of crazy. I'm not sure we would be doing this episode if

55:43Softbank 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 enane business model before moving forward David It is it is worth putting a fine point on the business model Where they don't manufacture chips about half of their business or a little bit less I think comes from designing the chips and then licensing those out and then you know they have this this large component of their business that is just licensing the instructions at architecture. 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 license their instruction set, and it means they get a cut of all chips that are manufactured using their IP. That sort of continues to blow my mind that

56:40somebody 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 two percent of the chip selling price, depending on which of their business models it was manufactured under. But like 35 cents of every, you know, A-Series chip, why is it that they've managed to hold on and actually get a cut of every single chip manufactured?

57:09I 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...

57:31more important than ever. But I think also it's the same reason why the windtell do happily existed, right? Like, even though Apple is more flexible about moving architectures than, you know, what Microsoft was back in the day. Android and iOS run on risk architecture chipsets. Are they really going to re-architect them for something else? There even is there is no other thing to re-architect to.

57:57Yeah, that's true. 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. 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 way bleeding into tech themes and random future forecasting, but they could write a new compiler, build it into Xcode, make it so that every app that's compiled just it works on their new chipset 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 taken over not only their own, I mean, they don't manufacture their chips, but they designed their own chips. They, of course, licensed the ISA from ARM, but like it does just seem like it would be one more...

58:44expanding 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 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 mean, you know, TI Qualcomm, whoever brought them 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. Mm hmm. Well, all right. So to pull back from tech, that's back to our story. Let's talk about the actual acquisition because that's the name of the podcast. This is like such a such a schizophrenic episode because until now, like really pulling us into the future, this is so.

59:39Important this company in this technology and I hope we've done a good enough job communicating that but this is like a hardcore technology episode But now we're gonna shift grab the wheel and shift back to like crazy, you know James Bond style soft bank and 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 is having a huge run because the financial community is starting to wake up to this fact that they're like, oh, hey.

1:00:24Uh, 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 soft bank that just came out. We know what happens here. So it's summer of 2016.

1:00:49And Masa is hosting a dinner for tech industry luminaries at his amazing nine acre estate in Woodside, California, which is like a super Tony community, you know, right outside Palo Alto, right right over 280. This is where Steve Jobs mansion was that he never built out. This is where Larry Ellison's whole compound is. And Masa has like an equally amazing compound there. He's hosting a dinner.

1:01:18One of the attendees at the dinner is Simon Seagars, 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 soft bank is an important partner because they're one of the world's biggest telecom operators. And so like, he wants soft bank 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.

1:01:56I'll go to this dinner. I'll hang out with Masa. They're sitting there at dinner. Masa starts focusing on Simon. He starts asking him a bunch of questions about what arm does, what the business model is, all the various devices that arm chips end up being used in.

1:02:17Do 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 super computers, like power is a limiting factor on performance. So they're starting to use us. Masa's like, hmm, interesting. So then Masa asked him, what now has famously become 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 he's like, well, I guess we'd probably keep doing everything, but...

1:03:06But faster. And Masa's 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 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.

1:03:34And this, this is the best part of David's, David's reporting here. This is, this is great. Well, it's, it's, we alluded to this in the car belt on, on the last show. So there's one problem, which is that Stewart is on vacation and he's on a yacht in the Turkish Mediterranean. But like, Mazda doesn't like yachts in the Turkish mid. Like, that's, that's his ballgame. Like, that doesn't face him. He's like, okay, well, you know, hang on.

1:04:02I'm going to call him. He calls him and he's like, uh, I need you to dock your boat in Marmee, Turkey, which is like a resort town on the Mediterranean coast in Turkey. Massa then sends a private jet to Cambridge picks up Simon. He jumps on his own jet. They all converge in Marmee. I don't know if it's Marmee French pronunciation or Marmee's in Turkey.

1:04:24Massive 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 Massive's like, I want to buy you guys. And I'm going to offer you $32 billion, which was a 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% and more typical situations. But I think it's a 43% premium. Yep. Typically with public to public acquisitions too, there's a lot of back and forth and there's investment bankers involved. And it's very rare that you get an Instagram style done in those two weeks. They got board approval and they announced within two weeks.

1:05:19Arm to remain an independent division within Softbank. Softbank's going to pay $32 billion to buy the whole thing. The market loves it. It gets shareholder approval, 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...

1:05:45Computing everywhere and what it'll enable becomes really the prototype for what soft bank is now doing with the vision fund so much so that the next year in 2017 when they actually get the fund set up soft bank corporate sells a 25% stake in arm at cost to the vision fund So the vision fund takes eight billion dollars right off the bat and buys 25% of arm from soft bank corporate So what do you think went on with that? Why? Well, I think massive was always thinking about this as an investment It was just that before the Vision Fund, the only way you had to invest was through Softbank Valency, 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. 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 five to seven years,

1:06:41Get a nice return on arm and sell it to someone else. So we haven't seen the last of this yet. Well, I think most likely, and this is what people started talking about after the the transfer to transfer. Yep, into the vision fund is re IPO it. I think that's the most likely outcome. But what's interesting and this also speaks to the vision fund strategy so.

1:07:01In 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, that's a lot less than Uber, that's a lot less than, I think less than Airbnb at this point. For a company that old and that was literally the foundation of all technology at that point, I mean, I think they have a 96% market share of all smartphone and embedded devices, embedded devices. That's not a lot of people.

1:07:31in 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?

1:07:52Are they not income negative? So here's here's what I was looking at at that. They, their operating margin was 52%. They're 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 they.

1:08:17It's interesting. They're selling a lot more devices. They're only make a little bit more money and their profits significantly dropped. Interesting. The margin dropped. I just pulled it up again. 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.

1:08:43The 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 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 Intel bought mobile eye for I think 17 billion dollars and mobile eye makes chipsets for cars in particular for computer vision for driver assistance and eventually autophily autonomous use cases arm is getting heavily into that market as well as well as all sorts of you know embedded computing

1:09:37Yeah, it's interesting because the stated reason at the time of purchase and at some point here We'll we'll breeze through the other sections of the show But at the time of purchase the the drum they were beating was its IOT that the internet of things is blowing up and because you know there's gonna be an armed device and much more than your phone It's gonna be in all these other things that are communicating with the internet around you That's why we believe that the growth is it's like Massa believed that there was some growth that was not priced in that he believed was going to expand the market for IoT devices was going to expand even greater than 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 feature cash flows. And it was IoT, IoT, and it's interesting to see tears later now on some of their investor relation stuff so 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,

1:10:3615, they were in, they were 15 billion, and now in, and they 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. It's like on what thesis do you have to believe in a specific thesis?

1:11:01about where there will be more CPUs, 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, let's see. You know, we were setting this up all along for an IPO narrative, but boom, acquisition. Because we've done so many recently. I know. Business line. For sure.

1:11:30Not even. No, no. I don't think Softbank does anything else quite like arm, so business line, and it's fully independent. Okay, what would it have in otherwise? 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 mosa got the cash to buy arm? Oh, interesting. I did not.

1:11:56It 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 know, you're taking advantage of a distressed asset here and he's pounding the table saying, no, I'm not taking advantage of a distressed asset. I really believe in this and I was just waiting for the cash to come in. Where the cash came in from was they sold $10 billion of Alibaba shares and $7 billion of Supercell shares plus they took a $9 billion loan.

1:12:25And 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 to like the ESPN deal. It's business model innovation all over the place here at Acquired.

1:12:52Yeah, so the 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 Apple then you know Qualcomm's freaking out that they're not gonna have access to their core technology anymore and same thing in the other direction. And so the number 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

1:13:46or 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 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

1:14:35computing company out there. But like, if they were to say to Wall Street, hey, you know, we're going to massively investing 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 going to be prevented from doing that. And I think this is the core of, you know, In some ways, it's like a hilarious late funny massage 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 I think in a lot of ways like soft bank 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

1:15:23value 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 anybody who uses any of their products, which is all of us. Totally.

1:16:10It's very much that you get the investors you ask for. There's a very reasonable chance that the public market was not a good place to go stand on that hill and say 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, 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 change of control like this. Yep.

1:16:39Should we move into tech themes officially? Yeah, let's do it. Finally, I've got two, which I know I've been beating this 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 Apple and its involvement here, you know, it is the marriage of technology and the liberal arts 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

1:17:21uh, on the main show that I think this really illustrates very well is when it comes to startups and investing, it's so easy. People make the mistake of focusing on what your Tam is today versus the much more important question of what your Tam is tomorrow. And this is such a great case study because like when arm the spin-off was getting started, and they were developing the risk processor. You could have looked at it and been like, this is so stupid. The market today is for IBM PCs, and it's the Microsoft Intel, WinTel, Duopoly is getting started. This company's dead in the water. This is so stupid, right? But...

1:18:07It 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.

1:18:35I am looking at a graph here with about 10 years where it looks like there's no growth in the right point. It's timing, timing, timing. 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 knew it was coming. Yeah, it's a great point. I have no tech themes. I have set all of them. Love it.

1:19:04Love 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 soft bank 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 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 and 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

1:20:00you know, a new way that people interact with technology. And ambient computing is that thing. They're probably all gonna have arm chips in them. Be it the AirPods, the David 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 and 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, you know, just be dumb and vetted devices like the little oven timer.

1:20:30or 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 this look like a pretty smart buy. Assuming that that was not already priced in. So when we just, like, 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, still feels like a good buy if you believe that we're gonna transition from sort of somewhere between one and a dozen that we regularly interact with to hundreds. Yep, it's funny. I'm just pulling up here because of course arms still reports 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 plus case.

1:21:26The C minus case, I think I fall in the ACAMP, but just a 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.

1:21:48They bought the company for a 32 billion two and a half years ago for a company that is still doing less than two billion in revenue. That's a pretty big gap to fill. If you're anticipating significant returns on your acquisition from 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.

1:22:16from an IR perspective, and the royalty portion of the company's revenue, which is the alignment with partners. So 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 I think the investment thesis is about, that number of units of shipped is gonna grow exponentially. It is the largest revenue stream in the company.

1:22:45But it's actually not growing that fast in terms of how much revenue they're getting. And I think that must be because they're just getting such a small amount from every device shipped. And as the devices proliferate and cheaper and more basic devices, you know, like sensors and the like become the vast majority of number of units, I bet they're getting fewer actual dollars from those.

1:23:11Yeah, 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.

1:23:30because there's some significantly lower power thing that 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 this is in that full length of time. I don't see anything else on the horizon that can actually really replace.

1:23:48arm and the risk architecture. But again, if you look at their financial results, the fastest growing portion is software and services. This sounds like the Apple narrative, all as well, even though our core business is flat to declining, we're making it up in services. That's not as defensible.

1:24:11I 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 or half of trillion dollars. But to the extent that arm actually has

1:24:55ecosystem 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. Yeah, this is a fun one.

1:25:24Thank you listeners for 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 been nice to have an hour and a half to understand that a little bit better. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

1:26:11Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yeah, in the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers. And how fast you can use that signal to guide what you shipped next. This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved. So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to Statsig.com slash acquired to get started.

1:27:06Well, folks, if you aren't subscribed and you want to hear more, you can subscribe from your favorite podcast client. If you like what we're talking about about kind of the future of computing and ambient computing, you should consider becoming a limited partner. So Kimberlite.fm slash acquired or click the link in the show notes. And we'll have some pretty fun guest guests coming up on the LP show pretty soon that we're excited about. So we will see you all soon. Indeed. See you next time.