How Microsoft makes money from Android

In Depth: And more secret Microsoft patent profits revealed

The recent revelation that Microsoft makes a packet from Android might come as a surprise.

But Android isn’t the only competitor Microsoft makes money from – and more often than not, the competition is happy with the deal.

Neither Apple nor Microsoft likes Android, and they both feel it infringes a number of their patents, but they’re taking very different approaches to Android handset manufacturers.

Apple is dragging HTC, Motorola and Samsung to court. At the same time, Microsoft has signed a licence deal with HTC and several other handset makers, is pursuing one with Samsung and spent over a year negotiating with Barnes and Noble, Foxcon and Inventec before turning to lawsuits and complaints to the ITC.


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For a company popularly seen as litigious, the legal action over the Nook ereader is only the seventh patent infringement suit Microsoft has ever brought – and some of those have ended in cross-licencing patent deals, like the deal with TomTom.

Linux and more

Indeed, Microsoft has licenced patents to over 700 partners, including Sony, Panasonic, Samsung (for a digital photo frame using technology from Windows Live Photo Gallery), Inrix, Volkswagen – and Linux (in the shape of Novell), as well as startups you probably haven’t heard of (Zumobi, Zignals, Eon Realities and Wallop).

Microsoft has even licensed technology to Apple and Google; the Exchange Active Sync protocol for getting email, contacts, appointments and tasks onto mobile phones (the iPhone and Google Sync use EAS).

Microsoft just renewed its 2006 five year agreement on patent cooperation with Attachmate, the new owner of SUSE Linux – just after releasing a “let’s be friends” birthday video for Linux.


HAPPY BIRTHDAY?: Microsoft couldn’t agree a licence deal with RedHat despite months of negotiations but this Linux birthday video seems to commemorate the renewal of the SUSE deal

The original Linux agreement was a big change for a company that used to think about patents as a way to crush the competition or force partners not to sue each other (or Microsoft), but it all goes back to Microsoft’s decision to start cross-licencing patents back in 2003, a year after general counsel Brad Smith was appointed with the slogan “it’s time to make peace” (which included the 2002 antitrust settlement).

Licensing Microsoft patents to OEMs like Toshiba, Samsung, NEC and Siemens in exchange for getting licences for their patents replaced the “non-assertion of patents” clause that Microsoft had added to OEM contracts after losing the Stac disk compression lawsuit.

Why Lost? Because Stac had bought a patent (from Ferranti). That’s according to Burning the Ships, an inside history of the change in Microsoft’s approach to licencing IP. It’s written by Marshall Phelps, Microsoft’s corporate vice president for IP strategy at the time that’s an excellent guide to internal Microsoft thinking and decision making.

iPhone eas

EVEN APPLE: Like Google and Nokia and RIM, Apple licenced the patent-protected Exchange Active Sync protocol

As corporate vice president Horacio Gutierrez (who took over from Phelps) put it, patents are “a currency that you use to trade to another company”.

But it’s not about the licence fees, apparently (even though Microsoft spends over $9 billion a year in R&D). Gutierrez claims, “We have adopted a policy of licensing almost everything we invent to anyone on fair, reasonable and reciprocal terms.”

How reasonable? Phelps talks about “modest revenues”:

“To put these in perspective, we have paid out orders of magnitude more money to license other people’s IP and technology – hundreds of millions of dollar each year – than we will ever bring in by licensing out our own.”

So why do it? Odd as it might seem, to make friends. Bart Eppenauer, Microsoft chief patent counsel, repeats: “Microsoft isn’t in the licensing business for the money. Even in an optimistic scenario, licensing revenues would amount to only a small amount of Microsoft’s annual revenue.

Far more important to us are the opportunities for collaboration with other leaders and innovators in the technology industry. Intellectual Property’s (IP’s) true function in society and the world of business today is no longer to serve solely as a club against competitors. This role has been supplanted in many respects by IP’s ability to serve as a bridge to collaboration.”

Helping to influence

That’s why Phelps pushed the idea of licensing IP in the first place; “because it was manifestly and inescapably necessary for us to do so if our company and our industry were to move forward in any sensible way.”

But as the other half of the saying goes, licensing also helps influence people. In 2005 Microsoft licensed EAS to Nokia; not only does that sell more copies of Exchange to Nokia-using businesses, but also,Phelps said, “helped move Nokia from RealNetwork’s media technology to that offered by Microsoft.”

There’s no shortage of controversy about the value of specific Microsoft patents, like the FAT file system it claims Linux infringes, but there’s also no arguing with the fact that Microsoft has developed a lot of technology.

For the last three years, the IEEE has rated Microsoft’s patent portfolio as the strongest in the software industry; the analysts at the Patent Board rank Microsoft as number two in IT generally – and right after IBM, which has over 5,000 patents granted most years, but mostly for services rather than software or hardware).

Analyst firm Ocean Tomo ranks patents by how often they’re cited as prior art and what money they bring it, calculating that Microsoft has the most valuable patent portfolio in the business.

The recent Nortel patent auction might have been amusing to watch (with Google bidding Pi billion and Microsoft only paying a share of $900 million split with EMC and Sony), but it’s started a spate of patent sell-offs, with InterDigital putting patents up for sale and investors suggesting Motorola should raise money by selling 4G patents.

By licensing so many of the 3,000 patents it registers every year, Microsoft has found an alternative.

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September 2011
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