The Significance of the Nvidia-Arm Merger and the FTC’s Move to Block It

Since Nvidia’s announcement to acquire Arm in late 2020, regulators have lined up to investigate and prevent the deal. Besides the recently-announced US Federal Trade Commission effort to block the merger, the two companies also face formal investigations by the EU, the UK’s Competition and Markets Authority, and agencies in South Korea, Japan, and China. While this effort by one of the biggest semiconductor firms in the world to purchase a significant computer chip designer was always expected to draw scrutiny, the current scenario must be regarded by proponents as close to the worst possible case.

Both Nvidia and Arm are major parts of the global semiconductor industry. Semiconductors and the chips made with them have brought ever smaller, cheaper, more efficient, and more durable computers. Over recent decades, they have become indispensable not only for the usual applications in engineering and telecommunications, but increasingly for many aspects of transportation, manufacturing, medicine, and entertainment. The Covid-19 pandemic, by interrupting global supply chains and causing prolonged chip shortages, has brought a great deal of attention to the crucial role of semiconductors in almost every major sector of the economy. For example, the shortage of chips is one of the main reasons car prices have risen so precipitously over the last year.

Although both companies are crucial in this sensitive global industry, they are critical for distinct and perhaps complementary ways. Nvidia is best known for GPUs—graphics processing units—that were originally associated with computer gaming. Over the last decade, however, they have found a use in almost every powerful computing project, from machine learning to cryptography. Arm, on the other hand, specializes in microprocessors and through the license of its chip designs, supplies approximately 90% of the world’s smartphones with crucial components. Nvidia and Arm have tried to use these distinctions to defend the merger from antitrust criticisms, emphasizing that they are not competitors. While this is essentially true, the deal is still a classic example of vertical integration. Such integration can potentially have social benefits, but its anticompetitive and monopolistic tendencies are also well known.

The potential for the deal to negatively impact market competition hinges on Arm’s unique role in the industry. For much of its thirty-year history, the firm has functioned as the “Switzerland” of microprocessors: Arm designs the chips and licenses them widely to companies like Google, Apple, and Microsoft, usually as part of ongoing support and development relationships that involve the exchange of sensitive or even proprietary information. This means the merger could potentially allow Nvidia to drive down its own costs in sourcing vital technology, but also to strangle its most powerful competitors by gaining valuable non-public information through their previous dealings with Arm.

The FTC’s suit also represents a pivotal moment in American politics that, for all its importance, is ultimately independent of the sensitive particulars of the semiconductor industry. President Biden’s nomination earlier in the year of Lina Khan was a significant moment: Khan is not only (as widely reported) a critic of Big Tech and the youngest FTC chair in history, but even more fundamentally, a scion of the new antitrust movement that has been brewing in neglected corners of the American left for over a decade. This movement sees the post-Watergate Democratic turn against antitrust enforcement (especially in the case of vertical mergers) and policy as the hidden key to modern politics—not to mention many contemporary economic and social problems. They are especially eager to avoid repeating the antitrust mistakes of the Obama administration. Khan’s nomination was thus seen as a somewhat surprising victory for progressives in a particularly substantive area. The FTC’s suit against the merger is Khan’s first major action as chairwoman and has enormous significance for the movement’s efforts to fundamentally transform American antitrust policy.

Nvidia and Arm have already fought back hard against these challenges. Together the two companies argue that the merger will not end Arm’s commercial neutrality, but rather save the stagnant firm from an unforgiving capital market and opportunistic “asset strippers.” More positively, they assert that the deal will drive technological innovation by developing the complementary strengths of the two companies. This could lead to more efficient data centers and even advancements in the new field of edge AI. While it is hard to believe that Nvidia would not, sooner or later, regardless of promises to maintain Arm’s neutrality today, try to use the merger against its competitors, it may well also be true that an IPO would be disastrous for Arm’s current business model or long-term independent survival. And certainly, the potential for complementary development is real. Whatever their outcomes, the deal and the FTC’s suit have enormous significance for the future of this crucial sector.