INTERVIEW - ARM CEO sees big potential in tablets

Laptops and tablets are displayed during the Computex 2010 computer fair at the TWTC Nangang exhibition hall in Taipei June 1, 2010.

SAN FRANCISCO (Reuters) - British chip designer ARM Holdings Plc says it expects to benefit from a coming wave of tablet computers beyond Apple Inc's iPad, as the new devices begin to eat into traditional notebook PC sales.

Warren East, chief executive of ARM, whose chip designs power 90 percent of the world's smartphones and a quarter of its electronic devices, said consumers are quickly adapting to the new computing paradigm that Apple has pioneered.

"I think tablets have more of a potential to cannibalize the notebook market and actually grow their own market because of this different usage model," he said during an interview with Reuters on Thursday.

He said tablets have already stolen the thunder of netbooks -- the low-cost, clamshell-style PCs based on Intel's chips -- that were all the rage last year.

Apple made its own application processor, the A4, for the iPad, using an ARM design. East said tablets are a natural fit for ARM, because they are similar to big smartphones.

The new tablets and tablet prototypes that have emerged in the wake of the iPad's launch mainly run on ARM designs and feature Google's Android mobile operating system. Forthcoming models are also expected to run on Google's Chrome platform, which will be available later this year.

Microsoft's Windows PC software -- which powers nine out of ten of the world's traditional PCs -- currently will not run on devices based on ARM chips, but East said tablets will put some pressure on the company to make it compatible.

"I think all of these consumer products, whatever form factor, pressures Microsoft to do that, because to some extent they're all cannibalizing the traditional PC," he said.

ARM's shares are up more than 60 percent this year. Persistent rumours that Apple was poised to acquire the chip designer have sent its stock shooting up on some days.

But East again vehemently dismissed the rumours, calling them "economic folly."

ARM's first-quarter profit surged 57 percent as its operating margin leapt to 40 percent. The company is benefiting from explosive growth in smartphones.

ARM licenses its chip designs to more than 200 companies for products such as set-top boxes, digital cameras and smart meters. ARM does not build chips, but rather collects licensing and royalty revenue.

Roughly 60 percent of the volume of ARM-based chips shipped is in the mobile space. The company earns about six times as much in royalties on a smartphone than it does on a standard handset.

Android is a big driver behind smartphone volumes, East said.

"We think Android is exciting because it's a similar sort of business model to ARM's in that it's totally open and it enables a whole raft of players to get towards the iPhone-like user experience." (Reporting by Gabriel Madway, editing by Matthew Lewis)