Samsung Licensing Deal a Symbolic Defeat in Microsoft, Google Patent War

Microsoft (NASDAQ:MSFT) continues to turn Android into a money making machine while ruining Google’s (NASDAQ:GOOG) claim that Android is a “free” operating system for the masses. Microsoft had already signed patent licensing deals with multiple Android device manufacturers like HTC, Acer, Onkyo, Velocity Micro, ViewSonic and others. Then yesterday, it announced that it had finally signed a deal with Samsung, the largest Android smartphone and tablet manufacturer. ^[1] Samsung will pay an estimated $10 to Microsoft for every Android device sold, which will sum up to hundreds of millions of dollars in the coming years. Licensing revenues from all Android device manufacturers could well add up to a billion dollars for Microsoft in the near future earning many multiples more than its own Windows 7 phone.

Google acquired Motorola Mobility (NYSE:MMI) earlier this year to defend itself and its Android partners with Motorola’s trove of patents, but so far these threats seem empty. Worse still, Microsoft is now reportedly going after Motorola for a licensing fee on its smartphone sales and it looks increasingly like Google is losing the patent war.

Check out our complete analysis for Microsoft

Android is Way More Valuable than Windows Phone for Microsoft

Windows Phone device sales have been well below Microsoft’s expectations in the recent quarters and is still a long way from becoming one of Microsoft’s major revenue generators. On the other hand, Microsoft continues to ink licensing deals with Android manufacturers and now has agreements with almost every major Android manufacturers except Motorola, which has been acquired by Google.

The deal with Samsung is by far Microsoft’s greatest coup yet. In the last couple of years, Samsung launched the two most popular Android smartphones – the Galaxy S and Galaxy S 2, and the popular Android tablets – Galaxy Tab and Galaxy Tab 10.1.

The Galaxy S 2 has sold more than 10 million units since its launch, which means that Microsoft will make roughly worth $100 million from this one device alone. ^[2] We estimate that Samsung will sell around 50 million Android devices in 2011, which means that Microsoft’s deal with Samsung could net it upwards to half a billion dollars in licensing revenues alone.

In July, Google announced that it was activating 550k Android devices a day. ^[3] Assuming that as the daily average number of Android devices, this implies that around 200 million Android devices will be shipped in 2011. Since Microsoft has licensing agreements with most major Android device manufacturers, we can make a reasonable estimate that it will make an average of around $10 from at least 100 million devices, summing up to $1 billion.

Microsoft is in a win-win situation here. The only non-Apple viable alternative to Android now is the Windows Phone. If smartphone manufacturers choose to go with Android, it makes money by way of patent licensing fees. If they go with Windows Phone, they pay Microsoft a direct fee for the software.

Was the Motorola Acquisition Worth it for Google?

Google acquired Motorola in larger part for its vast patent portfolio so that it could defend its hardware partners against Microsoft and Apple, which were suing them for patent infringement.

Now that almost all major Android device manufacturers have signed deals with Microsoft, it leads us to wonder whether the Motorola acquisition by Google was worth spending $12.5 billion and risking alienating its other hardware partners like HTC and Samsung. Immediately following the deal announcement, Samsung announced that it would refocus on developing its own operating system Bada in a move protect itself from its reliance on Google should it feel that the Google is favoring Motorola. To make matters worse, even Motorola may have to sign a patent licensing deal with Microsoft pretty soon, which begs the question of how Google will respond. ^[4]

We currently have a $28 Trefis price estimate for Microsoft, which stands about 10% above the current market price.

Also read: Google Groans as Microsoft Strikes Samsung Licensing Deal

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Microsoft and Samsung Broaden Smartphone Partnership, Microsoft [↩]
2. Samsung Galaxy S2 hits 10 million sales, CNET [↩]
3. Google CEO: 550K Android devices activated per day, Venture Beat [↩]
4. Microsoft Files Patent Infringement Action Against Motorola, Microsoft [↩]