We’ve known for a while that Microsoft was getting a cut of HTC’s sales of Android devices, under a patent deal announced by the companies more than a year ago.
But the extra detail that emerged this past week was still interesting: Microsoft is making $5 on every Android sold by HTC — and it’s asking for between $7.50 and $12.50 in negotiations with makers of other Android devices, according to a report from Citi analyst Walter Pritchard, quoted by Business Insider and others.
Even more remarkable: That could add up to as much as five times as much licensing revenue as Microsoft has made on on its own Windows Phone since its release last fall, according to a back-of-the-napkin analysis by the Asymco research firm.
But this isn’t simply about Microsoft making money from Android sales. The royalty payments add a fee to Android devices that wouldn’t otherwise exist for phone makers, since the open-source operating system is free for them to license. Microsoft, on the other hand, charges an undisclosed licensing fee for Windows Phone. So if Microsoft can effectively add a licensing cost to Android, it makes the playing field more level for its own mobile platform.
As Microsoft CEO Steve Ballmer told the Wall Street Journal last year, “It’s not like Android’s free. You do have to license patents. HTC’s signed a license with us and you’re going to see license fees clearly for Android as well as for Windows.”
In short, Microsoft is making a competitor more expensive — and collecting the resulting fee.
It’s pretty incredible, and you can see how it would even spark some outrage. But it actually wasn’t a huge surprise. That’s because, every once in a while, Microsoft’s business people do things that just make me sit back and say, damn, that was shrewd. It might not have been right, but it was shrewd.
One great example: Not long after the launch of the original Xbox, a company called Immersion sued both Microsoft and Sony for patent infringement for their use of force feedback vibration technology in game controllers. Microsoft and Immersion reached a $26 million settlement the next year, but they also quietly negotiated a clause that would give Microsoft a cut of any future settlement between Sony and Immersion.
In effect, the deal provided Immersion the financial means to continue battling Sony, which delayed the rollout of force feedback technology for the PlayStation 3. Years later, Sony settled with Immersion for $121 million, and Microsoft received more than $20 million of that settlement, after a bit of legal wrangling to enforce the contract.
In other words, Sony’s money was used to pay Microsoft back for funding the litigation against Sony.
See why I wasn’t surprised that Microsoft has managed to take a cut of revenue from Android sales?
Of course, Microsoft isn’t the only one pursuing patent claims against makers of Android devices. Apple has also filed suits against HTC, Motorola and Samsung, alleging that their Android implementations violate Apple’s patents. See the Citi chart at the bottom of the Business Insider report to get a sense for the litigation surrounding Android right now.
Microsoft isn’t commenting on the financial specifics of the report by the Citi analyst. When the HTC licensing deal was announced in April 2010, giving Microsoft royalties on HTC’s Android device sales, Microsoft corporate vice president Horacio Gutierrez called it “an example of how industry leaders can reach commercial arrangements that address intellectual property.”
Looking ahead, one question is how many Android device makers will end up paying the licensing fee to Microsoft (and/or Apple and others). Another question is whether Microsoft can extract royalties from Android tablets, not just smartphones. The stakes are high there, as well, given the threat those Android tablets could pose to Windows in the long run.
Key to watch in both respects will be Microsoft’s litigation against Barnes & Noble and the makers of its Nook over their use of Android in the e-reader. B&N has so far signaled a willingness to fight Microsoft — saying in its response to the suit that Microsoft wanted “shockingly high licensing fees” per device for the use of Android in the Nook.
Something in the range of $12.50 perhaps?