If you can’t beat ‘em, sue ‘em. That’s what Microsoft tried to do to HTC last year, and the latter buckled. Thus, Microsoft today is earning royalties for sales of Android-powered HTC smartphones and tablets.
In April last year, Microsoft made a bold claim about Android’s stepping on Microsoft intellectual property (IP). Microsoft believes that the infringement spans a broad area–from the user interface right down to the operating system itself. Horacio Gutierrez, Microsoft’s deputy general counsel, told CNET last year that the company prefers to settle IP disagreements amicably without going to court, but that the company also has the duty to ensure that “competitors do not free ride on [Microsoft's] innovations.”
That’s probably no longer news to you, as you may have already heard about it last year. What’s new, however, is the answer to the question: How rich is Microsoft now because of its deal with HTC last year?
Walter Pritchard answered the question last week: Microsoft is getting 5 dollars for every Android device that HTC sells. Pritchard, a Citi analyst, released his report on Microsoft last week. Pritchard’s report also says that Microsoft is going after Android device manufacturers and is asking for royalty fees ranging from US$7.50 to US$12.50 for every device.
According to Pritchard’s estimate, Microsoft has earned, so far, about US$150 million in royalty revenues from HTC sales of Android devices. The estimated amount is based on the approximate number of Android gadgets shipped by HTC, which is 30 million.
Microsoft’s own Windows Phone only earned the company about US$30 million from the sales of 2 million Windows Phone licenses, with the cost of each license at US$15. That’s only a fifth of what Microsoft is getting from Android via its deal with HTC.
Pritchard foresees more legal battles are coming up between Microsoft and other Android makers, including Barnes & Noble and Motorola. The next few months might unfold more legal arm-twisting from Microsoft, as, according to Pritchard, “Google appears to have very little IP to defend itself with.”
Microsoft’s strategy in this case seems to be that of crushing Android device makers’ operating margins. Another Citi analyst, Kevin Chiang, reports that Android phone manufacturers have a 10 to 15 percent operating margin, while tablet makers have 2 to 3 percent. Pritchard forecasts that as Android makers’ operating margins are eaten away, the attractiveness of Microsoft’s own operating system for phones and tablets may grow.
But, then again, Pritchard could be wrong. Unless Microsoft comes up with an operating system that will stand up to Android–in design, stability, and performance, among others–Microsoft will continue resorting to legal arm-twisting as part of its profit-making strategy.#
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Kind of crazy that microsoft is making more money with android phones then it is with their own phones.