Blog Post

Can Android be Microsoft’s next $1 billion business?

Google (s goog) last year said Android is a $1 billion business. Microsoft (s msft), it seems, may have similar plans for Google’s mobile operating system. Thanks to a barrage of patent licensing agreements with Android manufacturers, including a potentially highly lucrative deal in the works with Samsung, Microsoft is on its way to making big money with Android. How much could it all be worth?

Well, with 500,000 daily Android activations that Google recently reported, Microsoft could make $912 million in a year if it extracts $5 per activation on every Android smartphone or tablet sold. That’s how much it reportedly makes on each HTC Android device, as part of a licensing deal struck last year. It’s a long way to getting all Android makers to pony up, but you can see how big an opportunity this is for Microsoft, which is studiously lining up licensing deals with Android manufacturers. There are some 36 Android licensees as of May, making some 310 devices.

The latest and potentially biggest deal is reportedly in the works with Samsung, the world’s leading Android manufacturer in terms of sales. Microsoft is leaning on Samsung to sign a patent licensing deal that could pay Microsoft $15 for every Android device, although Samsung is reportedly trying to bring that down to $10. At that price, Microsoft could make an estimated $200 million alone just on Samsung Galaxy S II smartphones this year based on projections of 20 million sales. And if Android activations pick up speed, which is likely considering the pace of Android’s growth, it could mean an even larger opportunity of more than $1 billion annually for Microsoft.

Again, it’s no guarantee that Microsoft can strike licensing deals with every Android manufacturer but the Windows giant has been on a roll lately. It has recently signed deals with General Dynamics Itronix (s gd), Wistron Corp., Velocity Micro and Okyo Corp. Microsoft has not disclosed how much those deals are worth, though it said it was collecting royalty payments from the licensees. Many firms choosing to strike deals, including companies like Itronix, which presumably has some General Dynamics patents to cross license, suggests Microsoft has a pretty compelling argument that may work on other manufacturers.

Microsoft hasn’t won over everyone, however. Motorola (s mmi) has been a hold-out, as has Barnes & Noble (s bks). Both are fighting Microsoft in court over patent infringement claims. A win by either could help slow down Microsoft’s patent rampage on Android. But it could be some time before those cases are decided. In the meantime, if Microsoft can add Samsung to the list of licensees of patents allegedly infringed upon by use of the Android operating system, it could be a signal to other manufacturers that it might make sense to fall in line.

There’s something a little perverse about imagining Microsoft making so much from another operating system when it can’t seem to get much traction for its own mobile efforts. Gartner (s it) estimated Microsoft sold just 1.6 million Windows Phone 7 devices in the first quarter. It’s almost certain then that Microsoft made a lot more money from its deal with HTC, which sold 9.3 million phones in the first quarter, most of them Androids.

But it’s a sad fact of life in the fast-moving world of technology. Companies that aren’t necessarily competitive can still rake in dollars with their intellectual property. Nortel just sold its patents to a consortium including Microsoft, RIM (s rimm) and Apple (s aapl) for $4.5 billion, leaving Google without some significant patent protection. Google has decried the state of software patents but bid unsuccessfully on the Nortel portfolio to bulk up its defenses. But with Microsoft coming after its Android partners, Google doesn’t have much to say it seems. It may be that Microsoft’s patent licenses become just a cost of doing business for Android OEMs. I don’t think it will derail Android’s overall momentum, but it does undermine the promise of the platform as a free operating system. And it could lead to less innovation and added costs eventually passed on to consumers.

At any rate, Android is still a world beater for now though increasingly a huge lawsuit magnet. Google is still making its $1 billion from advertising on Android. Manufacturers like HTC are seeing record profits by feeding off of Android’s success. It seems like Microsoft is making sure that even if its own platform is starting slowly, it’s getting a sizable piece of the Android action.

15 Responses to “Can Android be Microsoft’s next $1 billion business?”

  1. Mauritz Nordlund

    People are missing why Android manufactures pay licensing fee’s to Microsoft.
    They do that because Apple has the “iPhone” patent and two weeks ago finally got the “multi touch” patent. Every single touch interface device does infringe on Apples patent.
    The Android makers are in panic since Apple has the touch interface patent and have quickly started to pay MSFT for protection.

  2. Well I hear that now MS is asking 15$ per cell from Samsung. About x3 than what they asked HTC to pay.
    The second one of those big companies simply take a different path and leave Android – somebody in Google should replace a job. This day is coming and fast and Google is – well at least appearing idle.

  3. Wait a minute now think, stop, think. We in the U.S. live in a market society. think about what you are saying with “free” nothing is free. Most people expect a paycheck for their work, I personally don’t mind paying a developer for their work, or music, or food from a farmer. Now think, think how can Google give away there work to me, yet still earn billions? Think! “Free” is a salmon egg on a hook free to the trout? Maybe you can see it that way, but is the fish free at the market? No. Google is in the business of selling people, people are the fish at the market, customers pay Google alot for their product wich is people. MS makes a product and sells it to you, sounds like a market system. Perhaps a utopian age of Aquarius would be nice, but I’m guessing our animal nature has some evolving to do before that happens. Think of free like the alphabet is free to use, but a book you pay the author for their story. Opensource or not its all the same at the end of the day, people want to earn a living, in the market system money is still important. You are paying for a developers skill in arranging code.

  4. ^ Lucian, I am with you. Just that in the current way business is done, Goggle is in deep deep – way above the head – smelly brown goo. If they are not careful, and this may be Page’s blind spot, our Android may really be in jeopardy. Slowly we may see manufacturers taking a different path. Its all about profitability.

  5. Dilip Andrade

    2 questions:

    1. Is it surprising that the biggest platform is attracting the most attention (especially in light of Google’s weak patent portfolio in this field)

    2. Is it really a bad thing that people who put in the development time and money don’t get a benefit simply because they didn’t perfect the marketing of the product.

    The answer to the first question is clear. It shouldn’t have surprised anyone. That includes the handset manufacturers.

    As for the second, there may be lots of people who disagree with the patent system, and particularly some of the weaker and sillier patents that get through, but many patents that are issued in technology fields today are relatively narrow in their scope. Companies like Microsoft aren’t trolls that scoop up patents and applications that they think can get claims that tangentially read on other technologies. Microsoft develops products, and has a forward thinking research group working on interesting but possibly not immediately commercial endeavors (Microsoft Research does do some pretty cool work). Microsoft seeks patent protection for what they invent, and receives it. Unless we want to move to a work without patents, it’s hard to fault MS for trying to gain a financial benefit from other people using technologies that they helped pioneer.

    • EqOrbit

      What do they invent for Android specifically? I don’t think it’s based on code or implementation.

      It’s more than likely MSFT patented the use of abstracts concepts on smartphone, e.g. using Map or Active Directory on mobile device. None of which has a single MSFT code in it, just the idea of having them smartphone is patented.

      MSFT are trolls when it comes to patent issues nowadays, they will sue anyone as long as it generates revenue. If MSFT did have a solid claim on those patents, why don’t they just sue Google directly, and not deal with these small players? It’s because MSFT doesn’t have a solid foot on those patents, in the first place.

      • Dilip Andrade

        MSFT likely goes after the handset manufacturers because they are the ones selling the product. The best that they could do with Google is get an injunction that puts an end to Android distribution with those features.

        The patent gives a time limited right to exclude people from making, using, or selling the invention. Here MSFT is going after the people selling, because that’s where the money is.

    • Ricky B

      1 isn’t surprising, unfortunately. For 2, to clear it up, Android is built off Linux and Java, not Windows CE and .NET. In this case, it’s Microsoft trying to gain a financial benefit from other people using technologies that those other people helped pioneer.

      Write code, pay for the right to use what you wrote…. yeah, that’s a bad thing. So, ultimately, the answer to both questions are clear.

    • But if they had some patents for products they’ve never even released or are too obvious, why should they get paid for it if someone else had a similar idea for a product, even though they didn’t reverse-engineer Microsoft’s technology, or perhaps weren’t even aware Microsoft had a similar technology?

      There are only *so many ways* you can build something. If there 5 min ways you can build something, and all 5 get patented, then if you’re the 6th to build something you’re screwed, because only those 5 ways are usable. Sure you could build a wheel that has a squared shape, but how useful is that?

      The current patent system punishes companies that build something in a *natural* way, without even being aware of someone else’s patents. The idea that you should go though the patent database just you make sure you are NOT infringing on someone else’s patent is ridiculous.

      The system should allow for certain things to be copied, otherwise you’ll literally have to re-invent the wheel every time you try to build something, which might be an effort in vain, because there may not be another way to build the product, and still be useful to the end-user.

      Microsoft is well aware of this problem with patents, but they are happy to take advantage of it, just like any other patent troll would. They even use the typical patent troll strategy. They go after the little guys first, make them pay up a “reasonable” amount so they don’t bother to go to court with them, and then go after the big guys and show them the list of other companies who have complied with their request as “proof” that they are right on this, even if they aren’t.

      Here’s what developers think about this, too:

    • Mauritz Nordlund

      Android manufactures pay license fee to Microsoft because they hope that Microsoft’s patent portfolio will protect them from Apple.
      2 Weeks ago Apple got the Touch interface patent. This is huge, since all touch based devices infringe on it.

      This is the business genius of MSFT. Apple invent, Android clone and MSFT gets license money.

  6. Will be interesting to see how many of these add-on fees accumulate – Microsoft, Oracle, Apple?… Could make it too expensive for android to be a world phone at dirt cheap prices.