Why Microsoft Will Dominate The Smartphone Space: Its Android OS Cash Cow

| About: Microsoft Corporation (MSFT)
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If you didn't know it, Microsoft (NASDAQ:MSFT) makes more money from Google's (NASDAQ:GOOG) Android operating system than its own Windows 8 phone. In fact Microsoft is probably not making anything from Windows phones, because like I said in a previous post, Nokia (NYSE:NOK) actually gets $250 million per quarter from Microsoft for going on the platform.

In April of 2010 HTC settled with Microsoft and would pay the company a license fee for every Android device it makes. Speculation has it that Microsoft gets about $5 for every Android device HTC makes. But evidence points that Microsoft is aiming at milking HTC for $7.5 - $12.50 per Android device.

In September of 2011 Samsung settled with Microsoft and many analysts say Samsung (OTC:SSNLF) will pay Microsoft hundreds of millions of dollars in Android licensing fees:

REDMOND, Wash - Sept. 28, 2011 - Microsoft announced today that it has signed a definitive agreement with Samsung Electronics Co. Ltd., to cross-license the patent portfolios of both companies, providing broad coverage for each company's products. Under the terms of the agreement, Microsoft will receive royalties for Samsung's mobile phones and tablets running the Android mobile platform. In addition, the companies agreed to cooperate in the development and marketing of Windows Phone.

It is rumored that Samsung will pay Microsoft between $10 and $15 for each smartphone or tablet it sells.

In October of 2011 Compal Electronics also agreed to a royalty agreement with Microsoft:

REDMOND, Wash. - Oct. 23, 2011 - Microsoft Corp. and Compal Electronics, Inc. have signed a patent agreement that provides broad coverage under Microsoft's patent portfolio for Compal's tablets, mobile phones, e-readers and other consumer devices running the Android or Chrome Platform. Although the contents of the agreement have not been disclosed, the parties indicate that Microsoft will receive royalties from Compal under the agreement.

Please note that Compal Electronics is a very big fish, making about $28 billion in sales per year.

In January 2012, Microsoft struck a deal with LG Electronics for all devices LG makes that run on Android OS. In fact in the same announcement, Microsoft says that 70% of all devices running the Android OS in the U.S. now "receive coverage under its intellectual property portfolio after the agreement." No details were disclosed but speculation on the street is that Microsoft is milking LG along the lines of HTC.

Microsoft's latest Android licensing trophy - number 18 - is Nikon Corporation. As per Microsoft's announcement several days ago:

REDMOND, Wash. - Feb. 21, 2013 - Microsoft Corp. and Nikon Corporation have signed a patent licensing agreement that provides broad coverage under Microsoft's patent portfolio for certain Nikon cameras running the Android platform. While the contents of the agreement will not be disclosed, Microsoft will receive royalties from Nikon.

Well it's official. Microsoft is milking the entire Google Android space across the board and there are probably very few (if any) Android manufactures who don't pay some kind of royalty to Microsoft. With competitors like these, who needs licensing allies?

So how much does Microsoft make from all these Android royalty fees? It's hard to tell because Microsoft does not break down the fees, but estimates are in the hundreds of millions on a yearly basis.

According to court documents provided by Google in a settlement with Oracle (NYSE:ORCL), Android generated less than $550m in revenues for Google between 2008 and the end of 2011. Asymco calculates, based on that data, Google makes as little as $1.70 per Android device per year. If true, Microsoft makes at least 5 times that amount on average. In fact even Apple (NASDAQ:AAPL) has gotten in on the action. Apple is also collecting royalties from HTC for its use of the Android OS.

Microsoft is having its cake and eating it too. On the one hand it is collecting royalties from its competition and on the other, it is pushing its own Windows 8 operating system including its smartphone platform at the expense of everyone else.

In the long run, if you think about it, the competition has nowhere to go. Microsoft by default will end up the winner in the smartphone space just because others do not have the financial firepower to compete with Microsoft in the long term.

My take: give Microsoft several years and it will be a major player - if not dominate - the smartphone space.

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.