Randy Durig on ARM Holdings (ARMHY)
Must admit I know little about Randy Durig other than what's stated in the brief bio below, and what he has sketched in a few basic "theories" that appear to be derived or distilled from others thinking.
>> ARM Holdings (ARMHY): “Three Themes for Growth”
Randy Durig
Durig Capital, LLC.
Lake Oswego, OR
PRNewswire
September 5, 2003
durig.com
Could this little monopolistic company become a big monopoly?
ARM Holdings appears to have achieved monopoly status in the wireless industry, plus according to our published theories we are now forecasting a revolution in the wireless mobile industry.
Past
ARM Holdings plc designs high-performance low-cost, power-efficient RISC microprocessors and related technology and software, and sells development systems to enhance the performance, cost-effectiveness and power efficiency of an extensive range of embedded applications.
ARM is a company with $275 million in sales and has roughly 80% market share for 16/32-bit cores in the wireless cell phone market. ARM supplies the architecture or cores to many companies that use them to make and sell a variety of embedded microprocessors. Just a few examples of such products include MP3 players, PDA’s, TV’s, cars, boats, hydraulics, disc drives, computers and phones.
Three Themes for Growth
The first theme is that 90% of total sales in the embedded microprocessor market were developed using 8-bit or lower technology. There is a massive natural migration underway into the higher performing 16/32-bit market in which ARM has many advantages (i.e., economy of scale, large existing software libraries and most 16/32-bit operating systems are designed for ARM’s technology). As the number of 16/32-bit embedded cores increases in products it bodes well for the company with the leading position in this very large natural migration.
The second theme is a forecast for global subscriber growth. According to ‘cellular-net’ recently (an internet newsletter), wireless telephone service subscriptions are estimated to increase 49% over the next four years. The average subscriber has about a two-year lifespan on their telephone hardware, and the increase in demand for services, and the combination could multiply the need for a lot more ARM cores.
The third theme and possibly the most important (yet the least discussed) is that the great monopolies in history had an ability to use their monopolistic advantages to increase sales. It occurred through effective bundling, distribution through a very large ecosystems or network effects, and selling directly through clients. ARM seems to be positioned in the center of these key building blocks with two new large natural migrations requiring many new solutions. ARM may already have tangible advantages. If they execute properly they could greatly increase their value position in the embedded processor space, which should increase the revenue per unit.
Forecasting A Revolution
According to Durig’s Law of forecasting a revolution, the wireless mobility market is one of the very few markets that currently fit the theorems qualifications. The theorem says a revolution needs an engine, or horsepower advancement far faster than comparable industries. On June 2 this year, Sir Robin Saxby, the Chairman of ARM Holdings, claimed, “the Moore’s Law affect will last another 15 years”. This means the processor speed for smart embedded devices should double every 18 months. Companies like Qualcomm (QCOM) and others are now accelerating the curve with 2 ARM processors embedded into each cell phone in their next generation of products. This level of advancement and breakthrough also appears in many of the other physical parts of these smart devices like color screens, longer battery life, faster download speeds, and more memory, giving several of the elements inside a mobile device a parallel curve to Moore’s Law. When each individual parallel curve or element is combined into a mobile product, the combined curve could see phenomenal advances.
Durig’s Law also claims that just as important as the technical advances are the demand sides of the equation. Building a second curve from the demand for applications, tools, software products and services will be those just waiting for some ‘killer’ applications to increase sales. Both the devices and the applications could achieve a large economy of scale advantage. It appears the software application curve is advancing faster than the hardware. But if both curves grow at a doubling rate it should help achieve such economies of scale that they could help migrate the whole ecosystem into new markets.
One example of a possible new migration is a smart wristwatch. First launched by DoCoMo (NTDMF) of Japan with success, now Samsung is targeting Europe and Microsoft (MSFT) plans to launch in the US by Christmas.
A second example of a new migration is the Nintendo Game Boy system that saw a performance increase of 50 times over it’s 8-bit processor. Combining faster speed with better hardware, advanced games, and better battery life has allowed Game Boy to become one of the worlds most popular handhold games.
Another example of a new migration in a software ecosystem gaining momentum is the very exciting industry of Voice Over Internet Protocol (VoIP). HelloSoft’s new HelloVoice is an advanced operating system (OS) which will run on both an ARM core and a Digital Signal Processor (DSP) over Linux. The ability to run with only one OS for both functions, one for the combined ARM and DSP core and a second for Linux, will greatly lower the cost and complexity, which in turn helps to enable the next VoIP inflexion point.
The new migrations and new applications should enable even greater economies of scale possibly providing new cycles of growth for whole ecosystems.
The Enabling Company
My Theorem of Enabling Technology states that a company that helps enable other companies or industries often directly or indirectly receives revenues correlative to the sum of companies or industries they helped enable.
Some of the larger enabled companies in the ARM ecosystem are Microsoft (MSFT), Intel (INTC), Motorola (MOT) Texas Instruments (TXN), Nokia (NOK), Palm (PALM), Qualcomm (QCOM), Samsung and many others. Perhaps most importantly these large companies are using ARM cores to advance their own very key franchises. Microsoft and Palm built ARM into their PDA’s. Nokia, Motorola and Qualcomm use ARM cores in their phone technology. Texas Instrument and Intel combined the processor with systems on a chip.
The Enabling Technology Theorem believes that the enabler, or in this example ARM’s revenues, will correlate directly to the sum of all the companies revenues for products based on ARM’s ecosystem. Since these are often key company franchises, located in growing markets, with some of the strongest brands, it seems logical to assume ARM’s revenues will grow nicely.
Monopolistic Advantages
Like other great dominating companies, ARM Holdings must learn to leverage its market dominance. Its largest competitor, MIPS Technologies (MIPS), is having a difficult time after loosing market share in the recent very large industry downturn. Their financial position was hurt and to such a great degree that it’s questionable if they can survive without a buyout from a large firm again.
Since ARMs network effect is so strong it will be important for the company to utilize its advantages to increase its very low average selling price (ASP) per unit.
One large advantage to performance is when software programs are embedded on a silicon chip rather than into an OS program. ARM cores could be able to bundle widely used programs directly into its cores allowing far faster performance over the competition.
One product that appears to be in an excellent position to grow average selling price (ASP) is Jazzelle. Jazzelle is a Java based software engine designed to optimize the software for the notoriously slow Java product. This engine provides far faster performance. ARM bundled Jazzelle into its cores allowing its clients a pre-configured solution that when combined with ARM’s economies of scale, allows ARM to provide a working solution at a lower selling cost. This combination may be the reason why Qualcomm, Nokia, Motorola and Siemens (SI) have committed to building Jazzelle into their phone technology. Gaining an alliance with the #1 fab-less phone chip company and the #1 - 2 cell phone producers in this new industry gives ARM the opportunity to reach up to 60% market share for this important software standard.
PrimeXsys™ Wireless Platform is a software platform designed to allow software applications to be built seamlessly and directly into the ARM cores. A couple more applications that ARM is also trying to sell based on PrimeXsys™ ecosystems, are Verification Methodology and Real View. One verifies the logistics and the other debugs the software program. These programs and PrimeXsys™ should allow outside programmers a far easier time building, emulating, and testing programs for ARMs cores.
Yet another platform being bundled into ARM cores is Trust Now. These cores are designed to provide security to the hardware side of a telephone. Some OS companies like Symbian believe that it will be far easier to secure the embedded hardware versus the OS, and for that reason a hardware based system will be a safer solution. Trust Now could become a large seller and another standard for the industry.
Most software designers would prefer their tools to be available to the largest number of units possible and being built into the ARM cores indeed allows them to be available for the majority of the 16/32-bit ecosystem. ARM’s platforms allow for a far more valuable location in the number of units consumed compared to the many single product OSs like Palm. Drawing in new software programs by offering the potential of far higher unit volumes, increases ARM’s value position in the embedded ecosystem.
Possible Risks
Stock volatility and earning history remains comparable to ARMs peers, however in the past it has demonstrated extreme value fluctuations. With few competitors, many analysts seem to think ARM is becoming complacent. A big risk would be if a new technology comes along at a much lower cost it could start a disruptive cycle against ARM.
Conclusion
ARM has leveraged its very large network effect into a monopoly position in the cell phone market. We think ARM has both a monopoly and a network effect. To fully understand ARM’s special position we recommend you read my theory on the Modern Monopoly Effect (MME). This will help to give insight as to why several of pasts MMEs were able to grow so quickly that they achieved the very pinnacle position in capitalism, becoming the largest companies in the world based on stock market value.
About the Author
Randy Durig has been in the investment industry for over 19 years. He spent most of his early years analyzing monopolistic companies. Unable to find an existing investment model, which utilized the advantages of a monopoly approach, he introduced and became the manager of the Monopoly Portfolio in 1997. This portfolio is a simple, long-term, tax efficient model. He believes his Monopoly Strategy can successfully forecast the next great dominator. He defines “Monopoly” as a company with several tangible advantages over the competition. <<
Related "Monopoly Theory" Links mentioned in the article above:
* DURIG’S LAW
durig.com
* DURIG’S THEOREM OF ENABLING TECHNOLOGY
durig.com
* DURIG’S THEORY OF MODERN MONOPOLY EFFECT
durig.com
Disclosure: I have a long position in ARMHY.
Best,
- Eric - |
