The U.S. Federal Trade Commission said on Thursday it is suing NVIDIA to block its planned $40 billion deal for Arm, alleging that it would hamper innovation in areas such as cloud data centers and self-driving cars.
The FTC said it opposes the deal because it would give a single company control over the technology that many of the world’s top chip designers, including NVIDIA rivals, rely on to develop competing products. The deal would also give NVIDIA the ability to cut off access to Arm’s designs to rivals, and could hamper future innovation at the heart of huge cloud data centers and advanced driver assistance systems (ADAS) in cars.
“The FTC is suing to block the largest semiconductor chip merger in history to prevent a chip conglomerate from stifling the innovation pipeline for next-generation technologies,” said Holly Vedova, who leads the FTC's bureau of competition, in a statement.
"This proposed deal would distort Arm’s incentives in chip markets and allow the combined firm to unfairly undermine NVIDIA's rivals," she said. If the FTC wins in court, Nvidia will be blocked from taking over Arm.
The lawsuit "should send a strong signal that we will act aggressively to protect our critical infrastructure markets from illegal vertical mergers that have far-reaching and damaging effects on future innovations."
NVIDIA announced it had agreed to buy Arm more than a year ago at this point. But industry analysts have warned that the deal will likely fall apart amid the backlash from regulators, rivals, and big Arm customers.
NVIDIA had previously said the deal was set to be completed in early 2022. But the lawsuit will likely add months of delays while the regulatory process drags on.
The "Switzerland" of Semiconductors
Arm builds central processing units (CPUs) and other intellectual property that other companies assemble into chips that power most of the global smartphone ecosystem. The company licenses the blueprints and the underlying instruction set architecture (ISA) at the heart of its CPU cores to chip makers such as Apple, Qualcomm, Samsung Electronics. Arm, which has around 6,000 employees, was sold to Softbank in 2016.
Arm CPU cores are also playing a deeper role in data centers with server processors and networking chips.
NVIDIA is the dominant player in graphics processing units (GPUs) widely used to run deep learning in data centers and create virtual game worlds on PCs. But many of its chips also depend on Arm-designed cores.
Arm is often dubbed the “Switzerland” of the semiconductor sector because it licenses its blueprints to hundreds of companies while competing with none of them directly, remaining a neutral player. Virtually every major semiconductor firm in the world use Arm, including Qualcomm and even Intel and AMD, which battle for market share with NVIDIA.
While U.S. chip giant Broadcom have come out in support of the deal, others oppose it. Qualcomm has taken issue with the deal over concerns that NVIDIA would get a sneak peek at Arm's intellectual property. Critics also fret that NVIDIA could choke off the supply of Arm's technology to competitors or raise prices for the designs they rely on.
The FTC warned that if the proposed deal closed it could give NVIDIA lopsided access to Arm’s technology, hurting competition by giving it an unfair advantage over key rivals. That ultimately would reduce product quality, innovation, and choice while prices go up for Arm's customers base, the FTC alleged in its lawsuit.
"Critical Loss of Trust"
Since most semiconductor firms use Arm's CPU cores to develop chips, they also count on Arm to regularly upgrade the cores and add features for future generations of products. Arm also offers related support and services. As a result, its customers routinely share proprietary and potentially "sensitive" information with Arm to aid in developing, testing, debugging, and troubleshooting new chip designs, according to the FTC.
The deal would theoretically give NVIDIA access to information that it could use to harm rivals, the agency said, such as de-emphasizing or even halting development of features important to its competitors.
The FTC said this would hurt competition in three markets where NVIDIA competes with Arm-based chips: autonomous driving systems in cars, data processing units (DPUs), and Arm CPUs for cloud data centers. The agency said this was likely to lessen Arm's incentives to pursue innovations that may conflict with NVIDIA's business.
“Arm licensees share their competitively sensitive information with Arm because Arm is a neutral partner, not a rival chipmaker," the agency alleged in the lawsuit, which names NVIDIA, Arm, and Japan's Softbank.
"The acquisition is likely to result in a critical loss of trust in Arm and its ecosystem,” the complaint said.
Regulatory Issues Ahead
NVIDIA, the largest U.S. semiconductor company by market value, has said that the fears are unfounded.
The Santa Clara, California-based company has said that it plans to invest further in Arm’s research and development, and it wants to keep Arm independent and preserve its open licensing model, which makes sure its designs are available to any company willing to pay for them, now and into the future. NVIDIA CEO Jensen Huang has also pledged to protect the confidentiality of any information it collects from companies.
But the deal has encountered a growing amount of regulatory resistance around the world. The European Commission, the executive arm of the EU, said in October it has launched its own in-depth investigation into the deal. The $40 billion deal also needs to get the green light from China.
Last month, the UK government announced that it wants a full six-month investigation into Nvidia's takeover of Arm over issues surrounding competition and national security. Arm is headquartered in Cambridge.
The FTC said that it has cooperated closely with the staff at competition agencies in the European Union, the U.K., Japan, and South Korea. The agency, which includes two Republicans and two Democrats, said that it voted unanimously to launch the suit.
The administrative trial is scheduled to start in August 2022, according to the FTC.
