Nokia (NYSE:NOK) is making an Android phone, just as Microsoft (NASDAQ:MSFT) is looking to acquire the company's handset division for a little over $7 billion. A rumor is also circulating that Microsoft might make Windows Phones compatible with Android apps. But, why would Microsoft and Nokia align with Google (NASDAQ:GOOGL)?
First of all, the Nokia phone, according to multiple sources including The Wall Street Journal, will most likely run on a modified, or "forked," version of Android. This means no Google Play Store, Gmail, Google Maps, etc. This also means hardly, if any, revenue would go to Google.
While Android controls roughly 80% of the smartphone market, that fact doesn't always generate revenue or profit for Google. Forking is popular in China, which might explain why the company doesn't really capitalize profit-wise in the country, even though Android dominates that market. The Android Open Source Project, or AOSP, theoretically allows any company to build its own ecosystem (while excluding Google's services) on the Android platform.
Amazon (NASDAQ:AMZN) has apparently decided to exploit this. The e-commerce giant built an entire ecosystem without Google's app store or developer services. Amazon's leading cloud computing infrastructure and unique offerings (such as Kindle) make it one of the few companies able to do this successfully. The company also offers music and movies, but with roughly 131,000 apps, the Amazon app store still pales in comparison to the near-million apps that populate the Google Play Store. Amazon can't match Google's breadth; it's depth in niche products, such as the Kindle, are where it succeeds.
Another AOSP addition?
Here's where Microsoft comes into the picture. Like Amazon, Microsoft has an incredibly strong cloud computing infrastructure. It also has unique offerings such as Skype, SkyDrive, Xbox Live, Office 365, Bing, and Outlook email accounts. It could be argued that products like Bing aren't as strong as Google's search engine, but this doesn't mean Microsoft can't, or won't, substitute them to completely bypass Google Services, creating its own forked version of Android.
Additionally, it's been speculated that Microsoft already makes a nice chunk of change from Android, thanks to patent royalties. Microsoft claims that it has 16 separate businesses with an annual run rate of $1 billion or more. One of these businesses is said to stem from Android patent licensing. Rick Sherlund, an analyst with Nomura, thinks that, as of last November, the company was making as much as $2 billion per year from these patents. He also explained that it was almost all profit, with a 95% margin being slapped on the company's Android revenue.
The company is still signing Android-related patent deals as well. The most recent deal involves Voxx Electronics and its devices running the Android OS, such as "rear-seat entertainment devices, tablets, and other consumer devices." This esoteric deal is confidential, so it's unclear how much royalty revenue Microsoft will be raking in. Fat margins on these royalties mean that they will inevitably drop down to the bottom line, however. Microsoft clearly intends to continue milking its patent licensing revenue for as long as possible.
The bottom line
Microsoft makes a lot of money from Android already, largely from its patent licensing revenue. Will it create Windroid devices going forward as well? That is entirely speculation, but the Android OS isn't as big of a threat to Microsoft as some may believe. A Nokia Android phone was apparently in the works before Microsoft decided to buy its handset division, so that doesn't provide any clues for the future, either.
If Microsoft decides to actually create its own Android phone, it will likely go the Amazon route and build its own ecosystem on top of the AOSP platform. It would probably replace Google's services with its own: Bing instead of Google search, the Xbox store instead of the Google Play Store, etc. It could also utilize Azure and Office 365.
Is this likely? Probably not because that would likely kill the current Windows Phone platform, resulting in fewer incentives for current developers. It's definitely a possibility, though. If a Windroid device ever does emerge from Microsoft, it will likely be a forked version of Android, bypassing Google completely.
Joseph Harry owns shares of Microsoft. The Motley Fool recommends Amazon.com and Google. The Motley Fool owns shares of Amazon.com, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.