One counter-trend in a strong quarter for Microsoft was a decline in overall licensing revenue in its Devices & Consumer business. Licensing revenue fell nearly $400 million to $4.1 billion, from $4.5 billion a year ago. In its quarterly 10Q filing, Microsoft says a large portion of the difference was “a $176 million decline in Windows Phone revenue.”
That phrase, “Windows Phone revenue,” does not mean what you might think it means. As the filing goes on to explain, the “Windows Phone revenue” decrease was “primarily due to lower per unit royalties based upon the mix of devices sold by our licensees.”
Translation: Android makers are selling more lower-cost devices, which means Microsoft’s revenue from those sales declined. (Note: Post updated to clarify the effect of the changing device mix.)
Microsoft makes billions each year from licensing its patents to makers of Android devices — much more than it makes on licensing Windows Phone to device makers — based on its assertions that the Google-led operating system violates its intellectual property. That revenue has climbed as the Android market has soared.
In contrast, Windows Phone’s market share remains in the single digits. However, Microsoft’s own sales of Windows Phone devices did increase modestly in the quarter: Microsoft sold 9.3 million Lumia Windows Phones in the quarter, up from 8.8 million Lumia units sold by Nokia in the same quarter a year ago, prior to the sale of the business to Microsoft.
Because of the Nokia acquisition, Microsoft giving up the licensing fees that it formerly received from Nokia, which totaled more than $600 million in the holiday quarter a year ago, but Microsoft has said it will fare better over time by selling the devices directly at a higher profit margin.
Looking ahead, the Android licensing fees received by the company aren’t a given. Microsoft is currently in a legal dispute with Samsung, the giant Android phone and tablet maker, which struck one of these deals with the Redmond company but is now trying to wiggle out of it.
Samsung alleges that Microsoft’s purchase of Nokia’s smartphone business has invalidated the deal. Recent court filings in that case showed that Samsung alone paid Microsoft $1 billion in licensing fees last year.
Separately, Microsoft confirmed overnight that it will start calling its Windows Phone devices “Microsoft Lumia” rather than “Nokia Lumia.” The agreement with Nokia requires Microsoft to stop using the Nokia brand after 18 months.