Why the Microsoft-Samsung Patent Dispute Could Ruin Windows Phone

Microsoft just sued Samsung over Android royalties -- but this dispute could end up destroying Windows Phone in the process.

Aug 7, 2014 at 9:02AM

Microsoft (NASDAQ:MSFT) recently sued Samsung (NASDAQOTH:SSNLF) over uncollected patent royalties related to Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Android. The lawsuit highlights a strange fact -- that Android hardware makers actually pay Microsoft -- not Google -- patent royalties.

Those payments were used to cover some bits of Android that came from Microsoft technology, and gave Microsoft a price advantage when it dropped all license fees for Windows Phone in April. This was a sweet deal for Microsoft -- it would profit from every Android device sold, while promoting Windows Phone to device manufacturers as a free alternative to Android.


Source: Wikimedia Commons, Flickr.

Unfortunately, Samsung -- the largest Android handset maker in the world -- stopped paying Microsoft those royalties after the latter acquired Nokia's handset division earlier this year. Samsung claimed that the acquisition invalidated its 2011 contract with Microsoft.

Microsoft argued that Samsung used its clout to convince South Korean regulators to invalidate the contract. Microsoft also stated that regardless of the ruling in Korea, many of the disputed patents were granted in other countries, invalidating Samsung's appeal.

What's at stake for Microsoft
While the case is tangled in a mess of patents and international laws, a ruling against Microsoft could hurt the company in three ways:

  1. It would lose a revenue stream from Samsung.
  2. Other Android handset makers could follow Samsung's example.
  3. It could cause Windows Phone to lose its free license advantage.

Microsoft has never disclosed exactly how much it earns per Android handset sold, but Geoff Duncan at Digital Trends previously estimated that it earns $1 per Android device. Research firm Gartner recorded 759 million Android phone shipments in 2013 -- which translates to $759 million in revenue for Microsoft last year. That would be equivalent to about 0.9% of Microsoft's fiscal 2013 revenue. Samsung sold around 300 million of those phones. Losing royalties from Samsung, or even all Android handset makers, wouldn't hurt Microsoft very much financially.


Samsung's Galaxy S5. Source: Samsung.

But if Android becomes royalty-free, Windows Phone loses its only competitive advantage. Windows Phone only has a 3.2% global market share, compared to 78.4% for Android and 15.6% for Apple iOS. Windows Phone plays a key part in Microsoft's "One Windows" strategy -- the idea that mobile devices, PCs, and the Xbox One all belong in a single ecosystem.

Without Windows Phone, the "One Windows" ecosystem dies before reaching mobile users. That's why Microsoft paid top developers more than $100,000 to bring apps to Windows Phone, slashed its license fee of $25 per phone to $0, and paid $7.2 billion for Nokia's handset division.

Taking into account all of Microsoft's aggressive strategies in mobile, research firm IDC previously forecast that Windows Phone's market share would hit 7% by 2018. More important, it would gain market share as iOS and Android declined. But if Android shakes off its "Microsoft tax," Windows Phone could lose market share instead.

Why is Samsung refusing to pay Microsoft?
Samsung, on the other hand, simply gains $1 per device sold if it refuses to pay Microsoft, instantly gaining $300 million in extra revenue based on 2013 sales.

Samsung desperately needs to cut costs -- last quarter, the company's net profit plunged 20%, year over year, due to increased competition from lower-priced Chinese competitors and unfavorable currency impacts. One rapidly growing rival in China, Xiaomi, has launched comparable smartphones to Samsung's flagship Galaxy S handsets for half the price.

Samsung's strategy of entangling its agreement with Microsoft between Korean and U.S. courts practically guarantees that the case remains unresolved for months. Even if a court finds in Microsoft's favor, Samsung will inevitably appeal the case to further delay a final ruling.

The Foolish takeaway
The longer this battle drags out, the more Samsung will benefit. Every quarter that goes by with the case unresolved will net Samsung bigger savings and leave a gaping hole in Microsoft's Android royalties. But Samsung is only the tip of the iceberg. If other major Android manufacturers like Huawei, LG, Xiaomi, Sony, and HTC also decide to stop paying Microsoft, Microsoft could find itself backed into a corner.

Google certainly won't lend Microsoft a hand. In fact, Google would probably encourage Android handset makers to stop paying Microsoft altogether, since it would strip Windows Phone of its pricing advantage.

Microsoft may be the one suing Samsung, but Samsung clearly has the upper hand in this battle.

Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares), Google (C shares), 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers