Earlier this morning Microsoft announced it had negotiated a far-reaching patent licensing deal with Samsung. Here's what the company's General Counsel Brad Smith said in a related blog post about the deal:
The Samsung license agreement marks the seventh agreement Microsoft has signed in the past three months with hardware manufacturers that use Android as an operating system for their smartphones and tablets. The previous six were with Acer, General Dynamics Itronix, Onkyo, Velocity Micro, ViewSonic and Wistron.
Together with the license agreement signed last year with HTC, today’s agreement with Samsung means that the top two Android handset manufacturers in the United States have now acquired licenses to Microsoft’s patent portfolio. These two companies together accounted for more than half of all Android phones sold in the U.S. over the past year. That leaves Motorola Mobility, with which Microsoft is currently in litigation, as the only major Android smartphone manufacturer in the U.S. without a license.
So that makes Samsung, HTC, Acer, General Dynamics Itronix, Onkyo, Velocity Micro, ViewSonic and Wistron. Next up Motorola Mobility?
Ironically Motorola is in part being acquired by Google ($12.5 billion) for its patents. However, if Microsoft succeeds in its litigation against the company it will have extracted fees from all the major Android OEMs. And it would be getting fees directly from Google (as the owner of Motorola). The rumor is that Redmond is trying to charge between $5 and $12.50 per Android handset.
Let's do some simple math. If there are 550K handsets activated daily and Microsoft secures fees from effectively all the major OEMs, the company could earn $1 billion or more annually from Android licenses. The more Android's market share increases, the more money Microsoft gains from Android OEMs.
This emerges as a major "insurance policy" if Microsoft's Windows Phones fail to take off with the Nokia partnership. The company is rolling out the long-awaited "Mango" update now, which offers a broad range of feature upgrades. However it's not clear that Mango will substantially boost demand in the near term for Windows Phones.
A combination of more hardware OEM participation and better software will almost certainly boost market share but the question is by how much? For the foreseeable future however Microsoft will probably make a great deal more money off its IP licenses around Android devices than it will its own mobile operating system.