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Microsoft has received five times more income from Android than from Windows Phone

Microsoft gets $5 for every HTC phone running Android, according to Citi analyst Walter Pritchard, who released a big report on Microsoft this morning.

Microsoft is getting that money thanks to a patent settlement with HTC over intellectual property infringement.

Microsoft is suing other Android phone makers, and it’s looking for $7.50 to $12.50 per device, says Pritchard.

HTC Pays Microsoft $5 Per Android Phone, Says Citi.

A rough estimate of the number of HTC Android devices shipped is 30 million. If HTC paid $5 per unit to Microsoft, that adds up to $150 million Android revenues for Microsoft.

Microsoft has admitted selling 2 million Windows Phone licenses (though not devices.) Estimating that the license fee is $15/WP phone, that makes Windows Phone revenues to date $30 million.

So Microsoft has received five times more income from Android than from Windows Phone.

Looking forward and assuming that Microsoft can receive this type of settlement from about half of the Android license takers, then the prospects of a windfall from Android dwarf the expected income from Windows Phone.

Google’s Android seems the best thing that could have happened to Microsoft’s mobile efforts, ever.

I could also calculate how the Android license income could be further funneled to Nokia (via their current agreement with Microsoft) for promotion of its phones. Thus, an Android licensee could reduce his margins in order to promote a competitor’s products.

Comments

57 Comments so far. Leave a comment below.
  1. sha,

    I'm not sure about this 30 million number… I expect this is for US-only sales ? Software patents are not enforced anywhere else in the world, or are they ?

  2. "Google’s Android seems the best thing that could have happened to Microsoft’s mobile efforts, ever."

    I'd disagree with this statement.

    "Google’s Android seems the best thing that could have happened to Microsoft’s profits." might be better. $150M on $0 COGS.

  3. Dick Applebaum,

    I wonder how this compares with the profit Google realizes per Android handset over its lifetime:

    Advertising Revenue – Android costs == Profit

    • famousringo,

      Actually, the formula is: Ad revenue + Google app licensing fees – Android costs = Profit

      But yeah, earning the amount of money that Microsoft is earning despite failing in the market is pretty impressive. If it can extract similar fees from other Android handset makers… well, failure has never tasted so sweet.

      We've seen quite a few patent holding companies which do nothing but extract rents from (often ridiculous) patents. I wonder if we'll ever see a company purely focused on reaping license fees from R&D. IBM has been heading that way.

      • failure has never tasted so sweet.

        Given the number of people that call Apple a "failure" due to 5-10% market share on PCs and the potential to, perhaps, only get 12-20% market share of the mobile space….

        I think Apple's "failure" will taste very very sweet:-)

  4. jeffrey,

    horace & others,

    perhaps a bit off topic, but am curious how income from IP licensing is reported by the major vendors discussed here at asymco. in the case of microsoft, would this ~$30 million be reported as income under "entertainment and devices division" or somewhere else in reporting ledger? does GAAP address any of this?

    i am NOT an investor. rather, am curious since it appears such IP income might become the most significant dollar stream for the losers (aka 'disrupted incumbent corporations') in the coming years – and how this income gets booked (given fleetingly small margins) would seem to matter when analyzing and ranking business performance.

    cheers.

    under GAAP

    • jeffrey,

      erp! sorry… clarifying / correcting my question. it should read:

      in the case of microsoft, would this ~$150 million in income from HTC be reported as earnings under "entertainment and devices division" or somewhere else in reporting ledger?

  5. MDD,

    Agreed. Would love to see a model of how much MS would be pulling in if they strike these deals with say the top 5 Android makes versus a rough estimate of Android's impact to Google's bottom line.

    If successful implementing this across the board, it would also seem Android would in practice be a licensed OS. Licensed to Microsoft.

  6. Yuri,

    I wonder how does $150 million compare to all the software patent litigation expenses Microsoft incurs…

    • addicted44,

      The litigation costs are probably negligible. The greatest costs are lawyers, and MS probably has a stable of lawyers at hand all the time anyways.

      It would be interesting to see their legal fees, if they break them down, to see how its changed.

      • I'm guessing that the size of the stable is driven by the revenue/expense expected. Still $30mm of revenue… that'd be a fair number of lawyers devoted to this one effort.

  7. "Thus, an Android licensee could reduce his margins in order to promote a competitor’s products."

    How long, I wonder, will this be acceptable to handset vendors? And what, if anything, will they do about it? Time to drag out an old chestnut: "When you sup with the Devil, bring a long spoon"

    • addicted44,

      The Business Insider article claims 10-15% OPERATING margins on phones, and 2-3% OPERATING margins on Tablets.

      All this to do nothing but promote Android. This is quite clearly untenable.

      And the best part is that these guys are competing with Google directly, which sells the best phones in the Android market.

  8. flixivs,

    and this does not include MSFT search deals on with operators on Android phones, such as that with Verizon for Bing…

  9. Jonathan,

    Google’s Android seems the best thing that could have happened to Microsoft’s mobile efforts, ever.!

    That makes little sense. If there wasn't Android about then most OEMs by default would probably be more receptive to Windows Phone.

  10. addicted44,

    I agree. The only phone makers who would NOT have chosen Google to run their search engines would be those who are being paid by MS to do so. And those folks are already dumping Google in favor of Bing (Blackberry, Nokia). Android possibly helps Google here, for every BB, Nokia phone it displaces. However, I would argue that Google could have paid far less than MS (and less than their cost of Android development) to simply make Google Search defaults on these phones, if Android wasn't directly competing against these phone makers.

    Additionally, Android has convinced Apple to offer Bing as an alternative (I sincerely doubt they do this without Android). Though its still not the default, that could change pretty quickly.

    The only area I think Google gains from Android, is any Android sale, which in the absence of Android would have gone to WP7.

    Unless Android reaches 70%+ (this is a random number) of the installed base in the next 2-3 years, I think Android may end up losing Google money (since nearly all their competitors are going to Bing), as opposed to how much they would have made without Android (essentially, all smartphones – WP7)

  11. I dont even know why microsoft is continuing with their mobile platform. Its pretty terrible just like microsoft's other OS's. Just make your money off google and android :)

    • WP7 is very nice actually. It brings a fresh perspective on dealing with the mobile issue. WP7 is fluid once things load (the weak spot now IMO though the last update did wonders to application load times), programs run very fast and fluid reminiscent of iOS much more than Android.

    • MS is WAAAY late to the post-iPhone game and I don't see that their nice interface ideas have in any way changed the Apps!!! Apps!!! Apps!!! game, which Apple will continue to lead. (At least, until Google figures out a way to make apps much more profitable for its developers, but this still won't help Microsoft.)

      Still, this is not yet a commodity game and Apple and Google shouldn't be the only companies in the world capable of disruptive tech innovations. I would welcome a user- (versus app-) focused phone experience that MS is struggling towards. A good many businesses would welcome a system where the phone synchronized automatically with the parts of the work function that were OK to travel out of their walls. These are long shots for BlackBerry and Microsoft but not impossibilities.

  12. Sam doji,

    It looks that search engine dichotomy between Bing and google is irrelevant. Google search engine technology is so advanced that their core business is modeled on this unique global domination on information acces with ease like it has never been possible to mankind and this constitute a real moat as Buffet explains what it takes to defend a business success .

    Anyone Who read Steven Levy book:-In the Plex-will understand that google is real goliath when it comes to search engine.

    So ganging up against google android by deploying Bing as a mean to derail google domination is in my opinion a lost battle.

    • addicted44,

      I think the opening Bing could (and is trying to) exploit is that no one needs all the information in the world. The vast majority of people use search engines for a few very specific purposes (shopping, news, flights, etc…).

      As long as you provide a better/quicker interface for accessing this, it might be sufficient to sway a large percentage of the users towards you.

  13. Ted_T,

    Do we have any evidence that Google is making more than $5 per Android handset? Especially if they have to pay the carrier to have a Google search installed or the phone ships with Bing as do many Verizon Droids. Not even counting per handset Android development/marketing costs.

    I do disagree to the proposition that Microsoft benefits overall from Android — $150 million more or less is hardly relevant. Not having sunk a billion or two in Danger acquisition/Kin development would have had more of an impact on Microsoft's bottom line. However Android helping kill Microsoft marketshare and mindshare in the mobile space, which is undeniably important.

    Google on the other hand doesn't need mobile device marketshare/mindshare — they need access to mobile search/advertising. Has Android genuinely helped Google in that regard — as opposed to helping competitors like Bing or Baidu — neither one of which had much hope to be the default on the iPhone/iPad/iPod Touch the way they are on millions of Androids.

    • asymco,

      The hypothesis is that Microsoft may benefit more from Android than they will from Windows Phone. It may be immaterial in either case, but since when did Microsoft's mobile efforts (or dreams thereof) result in material gains for the company? Microsoft does not have a credible business model for mobility. Come to think of it, neither does Google. In both cases they treat mobility as distribution for some other businesses and fear that if they don't control it, whoever does can shut them out of that channel.

      • “Microsoft does not have a credible business model for mobility. Come to think of it, neither does Google.”

        Quoted for Truth.

        This ought to be more than a footnote theme, as Google's behavior violates Stein's Law: If something cannot go on forever, it will stop. How long until it does?

  14. Wow, I am sure Nokia is feeling just a bit nervous right now. If Nokia doesn’t hurry up and deliver a stellar phone, Windows Phone is dead!

    Nice blog,
    Autom8r

  15. Microsoft most likely groups intellectual property revenue with the operating unit that created the patent in question. It's an asset of that division so it makes sense to source the revenue to that division. Here is a link to its 2010 revenue grouped by division. http://www.microsoft.com/investor/EarningsAndFina

    • jeffrey,

      thanks horace and twitx,

      thanks for the clarification. so the take home is that IP revenue is treated as income earned from assets and is presumably booked as part of a particular business unit (division), correct?

      again, my interest isn't about microsoft per say. rather, it strikes me that thin (or non-existent) profits of the disrupted incumbents can in some considerable way be inflated (or losses hidden) by income from IP… which is really to say that current earnings can understate current weakness since earnings on COGS are blended with earnings gained from past efforts (IP assets).

      horace & twitx – does this makes sense? am i swatting at flies here?

  16. CndnRschr,

    Love the irony. Of course, for HTC they are essentially paying a tax to Microsoft on every device they build. From their perspective, they have little bias or preference as to a sale of an Android or WP7 phone. They pay no matter what. Should Microsoft choose to use that money to fund WP7 OS development, then HTC is indirectly re-investing in at least one side of its business. Should Microsoft direct those funds to its Nokia deal, then HTC is indirectly funding its direct competitor. It's like a wife paying the rent for her husbands lover. Does HTC stand for Handover The Cash?

  17. asymco,

    I've been tracking the economics of Windows Mobile since 2004. Microsoft even reported the mobility division's P&L for a period of time. At no point did Microsoft receive revenues from that business in excess of their SG&A expenses (forget about R&D). With Android the revenues have no costs associated with them. If they can parlay Android's success into a steady stream of royalties, shareholders will benefit far more than if they kept Windows mobile/phone running at a perpetual loss. The calculation depends on the relative share of each platform so it can swing in favor of Windows Mobile if it ends up displacing Android, but so far that seems like a remote possibility.

    • hypnotosov,

      But it is highly unlikely that any other Android handset makers will opt for the license fee, unless they also have a profitable line of WP7 phones (which would give them a vested interest in playing nice with Microsoft).
      Remember, the license fee pertains to elements of Linux that are used in Android (that is in turn used on their phones). Since this is unlikely to actually stand up in court the only reasons to subscribe to this fee are avoiding litigation costs and avoiding potential loss of profit from cooperation with Microsoft.

      • asymco,

        There are 27 Windows Phones announced so far from Samsung, LG, Dell, HTC, Toshiba and Asus. ZTE also made a commitment. All these vendors also make Android phones or devices. Having said that I don't see the connection. Why would Microsoft be more likely to sue its customers? Motorola and Sony Ericsson are very likely to be in the crosshairs.

      • hypnotosov,

        In fact a lawsuit against Motorola has already been filed last year. I wasn't trying to suggest that Microsoft would be more likely to target it's own customers, but that they would be more likely to succeed in those cases.
        Microsoft could create incentives for those parties to underwrite the license by using a carrot and stick approach (with the possibility litigation being the stick).

        HTC is in a uniquely vulnerable position because it is comparatively tiny and it is fully committed to Windows Phone, so it stands to lose a lot if it's relationship with Microsoft goes sour.
        The manufacturers that only make Android devices, and no Windows Phones, only have to consider the cost of litigation. As a purely rational decision they have to weigh the cost of combating Microsoft in court against the cost of licensing fees, as well as potential brand damage from signing up.

        Leaving brand damage aside as an intangible factor Motorola would be expected to pay Microsoft somewhere in the region of 200 million USD in licensing fees a year. If they can keep litigation costs below that, avoiding the license is the best business decision.

      • asymco,

        Settlements of this kind are notoriously difficult to predict. HTC does have a strong history with Microsoft and a weak IP portfolio but I would not be surprised if Samsung and Motorola won't settle with Microsoft.

        The question remains whether Microsoft will ever provide a return to shareholders from mobility (other than from IP licensing).

  18. POLL: Should Microsoft continue to get $5 for every HTC Android phone because of their patents?
    http://www.wepolls.com/r/584161/Should-Microsoft-

  19. Marcos_El_Malo,

    Oh, I bet Google has an idea of how much advertising revenue they're getting from android mobiles Seems like a very basic metric for them to follow. I think they'd tell us if we asked really nicely.

  20. Microsoft and Nokia need to make a Windroid fork of Android, they can install Bing search on that thing. Android is open source and free, it makes no sense to try to compete with that. RIM, HP also need to implement Android now. iPhone 6 is also going to be running Android instead of iOS.

  21. Sander van der Wal,

    Licensing Symbian did also cost around USD 5, if I recall correctly. And after Open Sourcing it, it became free, as in beer. One starts wondering why no device manufacturer started using it.

  22. What I'm amazed at is the official, more or less, assumptions that three years from now Windows 7 Mobile or whatever it's called will be the leading OS in terms of share. How the hell can they think that is right? I know Nokia is an important partner, but how could Android and iOS lose to WM7?

  23. 21tiger,

    Hilarious and telling. Still waiting for the real WP7, which I guess will come long after iOS 5 is revealed.

  24. Stu,

    More useless speculation on numbers that MSFT hasn't provided on WP7. The 2 million number was for quarter one, we're quite a ways past that number and any guess as to the number of WP7's out there is just that, a guess.

    As for those typical, I hate MS, sheep, good luck with that. Talk to us all in about a year or so and we'll see who was right about Windows phones success and who was wrong. I'm not a particular fan or hater of any platform, but I've used them all and WP7 is as good as any. Obviously, it still has some things to add, but I think the signs are there, at least for any reasonable person, that the platform is likely to be a successful one. Anyone else is certainly welcome to their own opinion on that, but like I said, lets talk in about a year or so and see who right and who was lookling through bias tainted eyes.

    • asymco,

      Yesterday brought the news that Microsoft is asking up to $15 per Android device sold by Samsung. If Microsoft is able secure anything near that from Samsung, HTC and Motorola, the revenues from Android will surely exceed those for Windows phone. Especially considering they don't need to spend on marketing for Android, the profitability of Microsoft's Android business will be much higher.

      • Stu,

        Microsoft already has a deal in place with HTC for $5/phone. Samsung hasn't agreed to an amount yet, but I'd expect it to be more in the range of $10/phone and maybe an arrangement to produce some better WP7 phones. As for Motorolla, they are at present, more willing to battle Microsoft than pay a licensing fee and as we all know, court patent proceedings can go on for many, many years.

        Considering the cost to litigate against those who aren't willing to accept MSFT's terms for licensing and what I expect to be increased WP7 sales as time goes by, I'd say that short term MSFT will indeed make a considerable amount from the Android platform, but long term, will make much more from their offerings in the mobile market.

        To make it seem as if everyone will be just paying up and paying at a rate around $15/phone shows that you've done very little in keeping up with what's going on in the patent agreements and battles that MSFT are currently in. That was evidenced by the lack of info. you had on the 3 companies that you mentioned by name.

      • asymco,

        I am aware of the state of patent litigation. You may have missed the conjunction "if" introducing a conditional clause in my statement about the companies involved.

    • Angus Marshall,

      Hmm. So I think the last 2 years have proved you were kinda wrong…

  25. This makes you realize that their income hasn’t been that good on their own plattform :| But would probably changes as Windows App market opens..

  26. moha,

    microsoft is stupid , google will eat every thing ,

    منوعاتي

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  28. rehammagdy,

    ffffffffffffffff

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