Android was developed using technology from many different companies. When patented technology is used in open-source projects, companies really don't go after them because usually they have little or no revenue. However, when an open-source project hits the jackpot, such as Google's (NASDAQ:GOOG) Android, then the companies that control parts of the technology seek royalties, because these projects make money.
Such is the case with Android. And since there are many manufacturers out there who make and sell Android devices, Microsoft (NASDAQ:MSFT) has taken just about the whole space to court and is milking them (please consider: Why Microsoft Will Dominate The Smartphone Space: Its Android OS Cash Cow and Will Microsoft Milk Google Also?).
While we do not know exactly how much money Microsoft makes on average from each Android device sold, the general consensus is that Microsoft makes about $8 on average. If we translate that into dollar revenue, Microsoft stands to make as much as $3.6 billion in 2013 from Android royalties (I assume Microsoft is taking a cut from 60% of the 750 million Android devices that will ship this year, times $8 a device).
IDC recently forecasted that over 1.7 billion smartphone units will be shipped by 2017. If IDC is correct that Android OS will command 68% of the market, and if we also assume Microsoft will get a cut from 60% of those devices, then in 2017 Microsoft stands to make as much as $5.5 billion in royalty payments at today's going rate (my figures).
However, IDC also estimates that Windows Phones will also command about 10% of the market in 2017. So in reality, Microsoft directly or indirectly will have a revenue interest on about 80% of the total smartphone global market by 2017.
Now in addition to the devices business that Microsoft bought from Nokia (NYSE:NOK), Nokia also assigned its patents to Microsoft. Nokia alone holds about 25% of the patents covering 2G and 3G technologies. Many of these patents are crucial to the smartphone space and Nokia has license agreements with many companies. One question is, is the Nokia acquisition a bigger Microsoft plan to strong arm everyone in court, the same way Microsoft did with Android OS?
This remains to be seen; however, it is a double edged sword. As I have said on previous articles, Samsung (OTC:SSNLF) might try to swipe Android for Tizen in the future. If that happens (and my personal opinion is that it will happen), then Microsoft can kiss all that revenue goodbye. Because if Samsung makes the switch, then everyone else who makes android devices will follow.
So while a lot of commentators think that Microsoft bought Nokia for its patents, in reality the more Microsoft tries to milk other manufacturers, the more of a chance there is for them to dump Android and go over to Tizen, so as to not have these issues. And Microsoft is not the only issue they have.
Let me remind everyone that Google is now a direct competitor in the Android space, and it might pull the Android plug later on, if it feels it can make good money making devices (and I am sure this will happen also).
The bottom line is that Microsoft indirectly controls the biggest slice of the Android patent royalty payments space at the moment. The amount of payments Microsoft will be getting in the future will increase, as long as Android usage increases.
If Microsoft wants to play it smart, it must play dumb. Even if it has the financial and legal muscle to milk the Android space even more, it must avoid doing so, because chances are that the market will not stand for it. In my opinion, there will be a worldwide effort on behalf of Android manufacturers to switch from Android to Tizen at some point in the future. And that's a serious threat to both Microsoft and Google, if they have not prepared for something like this.
For the time being, however, Microsoft is the king of the hill, milking most Android device makers across the board. It actually doesn't get any better than this and I hope Microsoft realizes it and is not thinking to increase the amount of milk it gets from the Android cow.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.