SoftBank, one of the largest telecommunication companies in the world, just bid $32 billion to acquire ARM Holdings, designer of the chips found in everything from your iPhone to the Nest smart thermostat. On the surface, such an eye-popping number nearly sounds reasonable. After all, some 95 percent of smartphones have ARM-based chips, according to the company's own estimates. But as ubiquitous as smartphones may be, sales of new devices are slowing down. For SoftBank's bid to make sense, ARM will have to win the Internet of Things the way it did smartphones.

If ARM is unfamiliar, it’s because you don’t interact directly with ARM products. Its core business isn’t making the processors that are in your devices; it rose to prominence by drawing up the blueprints for them, and licensing those to outside companies. Its intellectual property is near-ubiquitous in mobile; by the company’s own estimates, ARM-based processors can be found in 95 percent of smartphones.

As you might imagine, being integral to the smartphone ecosystem has been a very good business over the last decade. ARM's stock price prior to the SoftBank takeover bid (which sent it shooting skyward by over 40 percent) had already more than quadrupled since 2010.

It’s tempting to see that dominance alone as validation of SoftBank’s aggressive ARM valuation. In 2016, however, the smartphone market has leveled off. Even sales of the iPhone have fallen. That’s potentially scary news for a company that designed the tech behind nearly nearly two billion mobile chips that shipped in the first quarter of this year alone.

So ARM may be getting out before the plateau turns into a cliff. But SoftBank isn't throwing $32 billion at a fading business.

“ARM will be an excellent strategic fit within the SoftBank group as we invest to capture the very significant opportunities provided by the ‘Internet of Things,’” said SoftBank Chairman and CEO Masayoshi Son in a statement announcing the acquisition bid.

In other words, SoftBank wants ARM not for the company’s most visible offering, but for its reach in across an entire class of products still in its relative infancy. It’s a huge bet, one that depends on the Internet of Things to pay out.

Kiyoshi Ota/Bloomberg/Getty Images

ARMs Wide Open

And it's not crazy to think it might work.

Smart home and embedded devices are still finding a foothold with consumers, but it’s a legitimate market, one that’s already generating revenue for companies like ARM.

More than half of the new licenses that ARM signed last quarter were for its Cortex-M class of processor, the kind that facilitates the microcontrollers, sensors, and low-power wireless communication chips that give “smart” devices a brain. ARM has a total of 378 Cortex-M licensees on the books, good for more than a quarter of its total across all lines. More Cortex-M based processors shipped last quarter than any other type that ARM designs. Of its 16 licenses with new customers last quarter, all but one was focused outside of mobile.

So within ARM, processors destined for smart and embedded devices already constitute a substantial business. But they have not weaned ARM off of smartphone-related revenue. Two-thirds of the company’s royalty income still comes from mobile, according to a recent FT report.

SoftBank wants ARM for its reach in across an entire class of products still in its relative infancy.

Still, there’s plenty of room to grow; a recent study from Grand View research pegged the IoT market as being worth nearly two trillion dollars by 2022, up from just over $600 billion in 2014. But for ARM’s ratio to shift—and for SoftBank’s proposed acquisition to be worth it—the company will need more than the growth of the Internet of Things. It will need to solidify its position as the incumbent in a still-unsettled field. And if you think that’s easy, just ask Intel about how the mobile market turned out. For that matter, ask ARM.

The good news, for SoftBank and ARM, is that it’s got as good a chance as anybody to do just that. "[ARM] processors are ideally suited for IoT applications," says Parks Associates Research Director Tom Kerber, citing their efficiency and affordability. The same strengths that helped ARM take over the world’s smartphones will help it do the same with connected devices.

It doesn’t need to reinvent itself to capture the future; it just needs to keep iterating on its already leading technology. Which is to say, the most important thing ARM needs to win again is the resources to keep investing in its lead.

“By accessing all the resources that SoftBank has to offer, ARM will be able to further accelerate the use of ARM-based technology wherever computing happens,” said ARM Chairman Stuart Chambers in today’s announcement.

Thirty-two billion dollars sounds like a pretty good start.