While much of the talk surrounding Microsoft's acquisition of Nokia's mobile business surrounds the inevitability of end-to-end mobile business models, there's a vastly different lesson to take from Microsoft's acquisition. Along with Nokia's mobile business Microsoft got a 10-year license to a massive treasure trove of mobile patents.
The real money, however, isn't in Microsoft delving deeper into Android patent royalties. Rather, it's in letting Nokia do it.
The Money Is In Android
Let's do the math on Microsoft's mobile strategy going forward. Last quarter, Nokia shipped 7.1 million Windows-based smartphones, on which Microsoft made less than $10 per device. That's $71 million. Not bad, right?
Wrong. At least, by comparison with how much Microsoft makes from Android.
By some estimates, Microsoft collects as much as $8 per Android device. Lower, but since current shipping volumes of Android phones are so much higher than that of Windows Phone devices, that means Microsoft could generate $4.3 billion in Android royalties in 2013, and $8.8 billion by 2017. That's real money.
And while Microsoft has indulged in wishful thinking that with combined "synergies" it could generate $40 per Nokia device, that's still small compared to its near-term potential to FUD Android distributors into license agreements. Last quarter Microsoft's hypothetical enhanced margin would have yielded $284 million gross, or an annual run rate of $1.1 billion.
To get to this hypothetical synergistic figure, Microsoft actually has to sell something, which requires real work. To mint $4.3 billion from Android licenses? It just needs to send out lawyers.
Shaking The Android Tree Harder
It may be about to get worse. While Microsoft talked up Nokia's device distribution, sales networks and other benefits, it was quick to call out the "valuable patent benefits" it derives from the deal. Microsoft walks through the cost benefits it receives from additional patent rights with Qualcomm and others that it receives through the deal:
Given that Microsoft got licenses to use Nokia's patents, and not the patents themselves, Microsoft likely saw the patents as a way to hedge against would-be litigants and lower its own IP costs associated with Windows phones.
But Nokia? Well, that's different.
Nokia has not historically licensed its patents, preferring instead to use them to defend against competitors. With the sale of its handset business, however, all bets are off, as Nokia spokesperson Mark Durrant acknowledged: "Once we no longer have our own mobile devices business, following the close of the (Microsoft) transaction, we would be able to explore licensing some of those technologies."
Microsoft has intimated that 80% of Android phones are covered by Microsoft's patent royalty agreements. Buying Nokia's patents outright may have given Microsoft an even stronger hand in convincing Android manufacturers to cough up patent royalties, but having Nokia do the same is even better. Microsoft has effectively imposed double taxation on Android licensees, all the while shifting the dirty work to Nokia.
The Mobile Patent Morass Just Got Worse
Microsoft may have just enabled a mega patent troll. Nokia no longer has any skin in the mobile game beyond its hugely valuable patents. Given Microsoft's success in shaking down Android licensees, odds are good that we'll soon see Nokia follow suit. Rest assured that in all this patent posturing not one shred of customer value will be created, but plenty may well be destroyed, and Android phones will become even more costly and less profitable to produce.