Android is 3x More Valuable to Microsoft than Windows Phone 7

by Trefis Team
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Microsoft (NASDAQ:MSFT) launched Windows Phone 7 last year with the hopes of making a major splash in the smartphone market. However, the tech giant’s biggest driver of value in smartphones so far comes from Android licensing fees as Android recently captured 50% market share worldwide and close to 40% market share in the U.S. market alone. [1] [2] The smartphone OS market is currently dominated by Google’s (NASDAQ:GOOG) Android and Apple’s (NASDAQ:AAPL) iOS that are both gaining market share at the expense Research in Motion‘s (NASDAQ:RIMM) Blackberry and Nokia’s (NYSE:NOK) Symbian.

We currently have a $28 Trefis price estimate for Microsoft, which implies around 15% upside to the current market price.


Android is Microsoft’s Next Billion Dollar Business

Microsoft’s Windows Phone 7 OS has failed to take off as successfully as it has planned while Android has rocketed. While the company expects sales to pick up with the launch of Windows Phone 7 Mango as well as the Microsoft-Nokia partnership, the Q2 sales numbers for Windows Phone 7 were disappointing.

However the company is licking its chops from the juicy licensing fees it gains from Android handsets. According to Horace Dediu, Microsoft sold around 1.4 million Windows Phone 7 in Q2, which brought in around $21 million from the $15 per Windows Phone 7 that it earns.

On the other hand, HTC sold 12 million Android smartphones in Q2 and raked in around $60 million since it earns around $5 per Android phone from HTC patent licensing fees. This is 3x the amount earned from its own OS from just the HTC licensing deal. [3]

In addition to HTC, Microsoft is in the process of entering patent licensing agreements with almost every major Android device manufacturer. And if Android’s success so far is any indication, we should see hundreds of millions of Android devices shipped in 2012. This could make Android Microsoft’s next billion dollar business, a topic we discussed in a recent note titled Android’s Success Could Lift Microsoft Past $27.

You can tweak this model to see how an increase of $1 billion in revenues from Windows Mobile (now Windows Phone 7) could boost our Trefis price estimate for Microsoft.

Check out our complete price analysis for Microsoft.

Notes:
  1. Android takes almost 50% share of worldwide smart phone market, Canalys, August 1, 2011 []
  2. comScore Reports June 2011 U.S. Mobile Subscriber Market Share, ComScore, August 4, 2011 []
  3. Microsoft Is Getting More Money From HTC Phones Than Its Own Windows Phones, Business Insider, August 4, 2011 []
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