FTC Sues to Block Nvidia-ARM Merger

Lina Khan is for real. That's why she led the FTC to challenge a $40 billion merger in the semiconductor space.

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FTC Chair Lina Khan

Back in February, I wrote up the proposed merger by Nvidia and ARM, which is part of a wave of consolidation in the semiconductor industry. Here’s background on the industry.

Nvidia began as a firm producing graphics chips for gamers, but eventually found that its architectural choices also made its products suitable for artificial intelligence and crypto-currency development. It has become one of the most important firms in the industry, with a market cap greater than Intel’s. However, unlike Intel, the corporation doesn’t produce its own chips, but relies on Taiwan Semiconductor, which is overloaded with orders. Nvidia is dealing with a chip shortage by intentionally crippling its own chips so they are less attractive to crypto-currency miners and can be reserved for gamers.

All of this is being done in the context of a major merger in the industry. Nvidia is now attempting to buy ARM, which has a dominant position in licensing chip designs for low power devices, used in mobile phones, cars, and increasingly many other industrial products. ARM is known as a neutral chip design platform, the ‘Switzerland’ of chips, and licenses to all comers. This is terrifying the industry, because Nvidia has a reputation as a hostile and ruthless competitor that uses every weapon in its arsenal to foreclose competition. Google, Microsoft, and Qualcomm are coming out in opposition to the deal, due to fear that Nvidia will leverage ARM’s dominant position in chip licensing into market power in new semiconductor segments.

Today, the FTC, with a 4-0 vote, sued to block the merger. The commission’s rationale for doing so is interesting. Here’s the head enforcer at the FTC - Bureau of Competition Director Holly Vedova - explaining the choice.

“Tomorrow’s technologies depend on preserving today’s competitive, cutting-edge chip markets. This proposed deal would distort Arm’s incentives in chip markets and allow the combined firm to unfairly undermine Nvidia’s rivals. The FTC’s 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.”

Vedova is making clear two things. First, the FTC sees open competition in the semiconductor industry as not only part of its mandate as an antitrust enforcer, but as part of a broader element in national strategy. The U.S. is currently in a significant policy pivot to protect its access to semiconductors, and part of that involves a $50 billion infusion of public capital into semiconductor production. Subsidies won’t work, however, if there’s not enough competition in chip design and production. And that’s why the FTC is stepping in here.

Second, Vedova is pointing the way towards more scrutiny on so-called “vertical” mergers. Nvidia and ARM are not direct competitors, but have a supplier-customer relationship. What Nvidia is trying to do is buy ARM for its chip design and software, and then design those products to rivals, such as Apple, Samsung, Amazon, and so forth, who rely on them. This is Lina Khan’s first major merger challenge. It is also a unanimous vote, and ironically, not all that bad for some of the key players in big tech.

There is a lot more here involving China’s control of a key part of ARM and the possibility of a Chinese attempt to fork semiconductor designs in a way that is harmful to the United States, but that’ll have to wait for a different piece.