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Industrial IoT, a Silicon Valley Opportunity

Tuesday, April 11th, 2017

Gabe Moretti, Senior Editor

I read a white paper written by Brian Derrick, VP of Corporate Marketing at Mentor titled Industrial IoT (IIOT) – Where Is Silicon Valley?  It is an interesting discussion about the IIoT market pointing out that most of the leading companies in the market are not located in Silicon Valley.  In fact Brian only lists Applied Material as having a measurable market share in IIoT (1.4% in 2015), HP and Avago as sensors providers.  Amazon and Google are listed as Cloud Service Providers, Cisco, ProSoft, and Cal Amp as Intelligent Gateway Providers and Sierra Wireless as Machine to Machine Communication Hardware supplier.

It does not make sense to list EDA companies in the valley that supply the tools used by many of the IIoT vendors to design their products.  Unfortunately, it is the service nature of EDA that allows analysts to overlook the significant contribution of our industry to the electronics market place.

There is actually a company in Silicon Valley that in my opinion offers a good example of what IIoT is: eSilicon.  The company started as a traditional IP provider but in the last three years it developed itself into a turn-key supplier supporting a customer from design to manufacturing of IC with integrated analysis tools, and order, billing and WIP reports, all integrated in a system it calls STAR.

A customer can submit a design that uses a eSilicon IP, analyze physical characteristics of the design, choose a foundry, receive a quote, place an order, evaluate first silicon, and go into production all in the STAR system.  This combines design, analysis, ordering, billing, and manufacturing operations, significantly increasing reliability through integration.  The development chain that usually requires dealing with many corporate contributors and often more than one accounting system, has been simplified through integration not just of engineering software tools, but accounting tools as well.

I think that we will regret the use of the term “Internet” when describing communication capabilities between and among “Things”.  Internet is not just hardware, it is a protocol.  A significant amount of communication in the IoT architecture takes place using Bluetooth and WiFi hardware and software, not internet.  In fact, I venture that soon we might find that the internet protocol s the wrong protocol to use.  We need networks that can be switched from public to private, and in fact an entire hierarchy of connectivity that offer better security, faster communication, and flexibility of protocol utilization.

I find that the distinction between real time and batch processing is disappearing because people are too used to real time.  But real time connectivity is open to more security breaches than batch processing.  On the manor, for example, a machine can perform thousands of operations without being connected to the internet all the time.  Status reports, production statistics information, for example, can be collected at specific times and only at those times does the machine need to be connected to the internet.  For the machine to continuously say that all is normal to a central control unit is redundant.  All we should care is if something is not normal.

The bottom line is that there are many opportunities for Silicon Valley corporations to become a participant to IIoT, and, of course, start-ups, a specialty of the Valley, can find a niche in the market.

The ARM – Softbank Deal: Heart Before Mind

Tuesday, July 19th, 2016

Gabe Moretti, Senior Editor

If you happen to hold ARM stock, congratulation, you are likely to make a nice profit on your investment.  SoftBank, a Japanese company with diversifies interests, including Internet provider, has offered to purchase ARM for cash by tendering $32.4 billion dollars.  SoftBank is a large company whose latest financial result show that it made a profit of $9.82 before interest payments and tax obligations.

ARM, on the other hand, reported for 2015 fiscal year revenue of $1.488.6 billion with a profit of $414.8 million and an operating margin of 42%.  This is a very healthy operating margin, showing a remarkable efficiency by all aspects of the company.  So, there is little to improve in the way ARM operates.

What seems logical, then is that SoftBank expects a significant increase in ARM revenue after the acquisition, or an effect on its profit due to ARM’s impact on other parts of the company.  ARM profit for 2015 were 414.8 million British sterling and the revenue in sterling was 968.3 million for a ratio of 42.8%.  Let’s assume that SoftBank instead invested all of the $32.4 billion and obtained a 5% return or $1.62 billion per year.  To obtain the same result from the ARM acquisition it would mean that ARM must generate a profit of 3.9 times what it generated in 2015.  This is a very large increase since if we assume that all other financial ratios stay the same revenue would have to be a little over $5.5 billion. Yet, using the growth of 15% realized between 2014 an2015 for every year between 2015 and 2020 we “only” achieve a $2,913.6 billion mark.  And keeping the growth ratio constant as revenue increase gets harder and harder since it means a large increase every year.

So the numbers do not make sense to me.  I can believe that ARM could be worth $16 billion, but not twice as much.  And here is another observation.  I have read in many publications that financial analysts expect the IoT market to be $20 billion by 2020.  Assuming that the SoftBank investment, net of interest charges, returns 5% per year in 2020, it would mean that ARM’s revenue would be $5.5 billion or over 25% of TAM (Total Available Market).  This, I consider impossible to achieve, simply because the IoT market will be price sensitive, thus opening ARM to competition by other companies offering competitive microcontrollers.  SoftBank cannot possibly believe that Intel will go away, or that every person will own three cell phones each, or that Google will use only ARM processors in its offerings, or even that IP companies like Cadence and Synopsys will decide to ignore the IoT market.

I am afraid that the acquisition marks the end of ARM as we know it.  It will be squeezed for revenue and profit like it has never been before and the quality of its products will suffer.