Friday, November 08, 2013

Microsoft rakes in 5x the profit from Android patent licensing than from Windows Phone

Microsoft may be losing -- some will say it has already lost -- the mobile device wars to Android (Google) and iOS (Apple), but it is crying all the way to the bank. According to a Nomura analyst (via Business Insider on Thursday), the company is making $2 billion annually from its Android patent licensing agreements with various OEMs. That is five times what the company makes from Windows Phone, its own mobile platform.

Nomura analyst Rick Sherlund in a new note on the company said more than just that the amount is 5x what Microsoft makes from Windows Phone. It is also, he asserted, being using to disguise the losses in the company's entertainment and devices division (EDD), which traditionally covers Xbox, Windows Phone and Skype -- but also includes the Android royalties.

Sherlund estimated that without those royalties, EDD would be losing about $2.5 billion a year, $2 billion of which is attributable to the company's Xbox platform.

This is an estimate, however. Sherlund arrived at Microsoft's $2 billion Android annual licensing revenue by assuming that the company averages a licensing fee of $5 per Android unit, and that Microsoft has about 70 percent of the total market covered by its licensing deals.

Notably, previous estimates have put Microsoft's licensing revenue per unit at between $5 and $15, depending on the deal. Microsoft has revealed it has licensing deals in place with almost every major Android OEM, but the company has never revealed the financial details of the deals, nor how many of the agreements actually bear fruit (royalties).

Sherlund further assumes that the royalties are a cash cow, with a 90 percent gross margin. He estimated that Microsoft made $1.6 billion -- in profits -- in the fiscal 2013 and will make $1.73 billion in fiscal 2014, and $1.82 billion in fiscal 2015.

By comparison, Sherlund believes Microsoft's Windows Phone business will bring in $3.3 billion in revenue this year, but with only $347 million in gross profits.

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