Arm Holdings' Chip of the Future

While semiconductor company Intel dominated chip sales in the PC era, another company has taken over the mantle in the era of smartphones and tablet computers. Chips based on architecture designed by UK-based Arm Holdings (Nasdaq: ARMH) have become predominant in popular electronic devices like the iPhone and iPad.

Arm is not sitting on its laurels either. It is aggressively designing more semiconductors to be used in devices of the future. The company recently announced a significant development, an ultra-low-power chip that could pave the wave for an “internet of things”. Everyday items like refrigerators and clothing would have “online identities” that would give the complete history of the item to anyone with a smartphone to scan the information. Common items in our lives would all have the ability to communicate with each other using microprocessors from Arm's design. This would be useful in smart energy systems, for example.

The company said it had created the world's most efficient microprocessor design. The chips would be capable of fast processing as the chips in today's smartphones but using just a third of the power currently eaten by a typical, 8-bit microprocessor. The company's “Flycatcher” 32-bit design allows the chips to be just 1 millimeter square and be able to run off a tiny battery for very long periods of time. The chips would also have a very low power 'leakage'. This means that in the future these chips may be embedded in nearly everything we come across in everyday life.

Microcontrollers are a very fast growing source of revenue for Arm Holdings. Some one billion chips were shipped in the fourth quarter of 2011 alone that use Arm's architecture, up from 40% from a year earlier. It is expected the new microprocessors would sell for about 20-25 cents each.

Telecom equipment company Ericsson ADR (Nasdaq: ERIC) recently forecast that there would be roughly 50 billion connected devices by 2020, up from just 5 billion in 2010. And Arm chips are likely to be in most of them. So even though Arm receives a royalty of only 1%-2% on each chip, it adds up quickly. For those interested in that future with 50 billion connected future, there is interesting information on Ericsson's website about it and can be found here.

Already Arm has licensed its Cortex-M0+ processor design to semiconductor companies Freescale Semiconductor (NYSE: FSL) and NXP Semiconductors (Nasdaq: NXPI). NXP should be familiar to investors as a leader in NFC (near field communications) chip technology. So not only is it looking to cash in on the lucrative mobile device transaction sector, but also on the 'internet of things' in the years ahead.

Takeover candidate Freescale is a big believer in the technology. Its vice-president Geoff Lees said “It opens up all devices to the potential of being connected all the time. It allows us to provide connectivity everywhere.” There are many more chip companies likely to follow, licensing the design from Arm Holdings.

That is not to say that Arm is alone in designing ultra-low-power chips. Two U.S. semiconductor companies are also competing in this space – Atmel and Microchip Technology. Atmel offers 32-bit “Avr” products along with Arm-based chips while Microchip Technology builds a range of 32-bit “Pic” microcontrollers.

The “internet of things” is coming and as Tom Halfhill of the research firm Linley Group said, “The internet of things will change the world as we know it”. And for now, it looks like Arm Holdings chip designs will be at the forefront of this new technological age as it was the mobile phone and tablet computer age.

This article was originally written for the Motley Fool Blog Network. Please check out all of my daily posts for the Motley Fool at http://blogs.fool.com/tdalmoe/