Get ready for iRoyalty, Apple's (AAPL) latest product. After its win in San Jose, Apple may sell a slew of licenses to the Android manufacturers. For HTC, Huawei, and ZTE, purchasing Apple licenses is more appealing than appearing at the federal courthouse. You can buy lots of patent protection for under $1.05 billion. Everyone saw what happened to Samsung (SSNLF.PK). Samsung blew off Apple's licensing deal and wound up in court. Apple's offer to Samsung: $30 a handset, $40 a tablet minus a 20% discount for cross-licensing.
Microsoft (MSFT) took a deal from Apple, probably on far more favorable terms (After all, Ballmer & Company didn't dump 50 million iPhone knockoffs on the market.) Next time Apple calls the Android makers to offer patent terms, they may listen more closely.
It's Already Being Done: Microsoft's Extortion of Google's (GOOG) Android Partners
For all the hoopla, another "tax" wouldn't be anything new for Android manufacturers. In fact, Microsoft has been licensing patents to the Android makers after winning court battles. To date, Microsoft is extracting royalty fees on over 70% of Android smartphones, including those of HTC, Samsung, LG, and Motorola-- a practice Google labels "extortion". Samsung pays Microsoft between $12 and $13 a handset; HTC forks over $10 a piece. Microsoft makes lots of money off the Android, far exceeding its Windows-based smartphones.
Ironic isn't it? Google bought Motorola Mobility for its patents. It also acquired an obligation to pay Microsoft a licensing fee for every Android Motorola sells.
Per Steve Ballmer's WSJ interview:
Android has a patent fee. It's not like Android's free. You do have to license patents. HTC signed a license with us and you're going to see license fees clearly for Android as well as for Windows.
With Microsoft's raft of Windows 8 phones set to launch, Ballmer & Company will get license fees from everyone except Apple.
Google phones get taxed and then taxed again
First came Microsoft with its "awful" extortion of Android profits. Now it's Apple's turn to charge the original device manufacturers (ODM). Apple's Tim Cook and Google's Larry Page have been having talks regarding their intellectual property dispute. I wouldn't be surprised if Tim offered to license Apple's patents in exchange for a hefty fee from Google.
The Bottom Line:
Apple scored a major win in San Jose. While licensing fees are unlikely to impact Apple's $40 billion bottom line, it will hurt that of the Android makers. Ten dollars a phone to Microsoft; ten to Apple. Enough fees and the Android may no longer be a money-maker. A number of the ODMs are launching Windows OS smartphones. Windows OS may turn out to be cheaper than the "free" Android one. Microsoft may be laughing all the way to the bank: Its platform just got a lot more appealing after Apple vs. Samsung.
Google's Android dominates the smartphone market. Get ready for Apple and Microsoft to take back market share.
Disclosure: I am long AAPL.
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