It's no secret that Samsung (OTC:SSNLF) is heavily dependent on Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and its Android operating system for its mobile devices. The Korean electronics maker has tried to wean itself off of Google by helping develop Tizen, a fork of Android OS. Tizen would allow Samsung to exercise more control over its devices, but the OS suffers from a dearth of app developers, making it relatively unattractive for smartphones.
Samsung may change direction in 2015 in order to move further away from Google. According to a report in The Korea Times, sources say the company is testing devices using Microsoft (NASDAQ:MSFT) Windows Phone. Microsoft has struggled to capture a large amount of market share in smartphones, but the support of Samsung could give it a big boost this year, however, any way forward is not clear sailing.
First things first
Samsung hasn't released a new Windows Phone in nine months. Last August, Microsoft sued Samsung, alleging the phone maker failed to pay Microsoft the royalties it was owed from sales of Android phones.
While Google doesn't charge anything to use Android, Microsoft collects a few bucks in royalties from the OS due to certain patents used in Android. When you sell millions of Android devices, those royalties start to add up.
In 2013, Samsung reported that it owed Microsoft $1.04 billion in patent royalties, but failed to pay that amount until November. Samsung felt that Microsoft's purchase of Nokia in September of 2013 invalidated the patent cross-licensing agreement between the two companies. Due to the late payment, Microsoft is asking for $6.9 million in interest and late fees.
Although chatter has ramped up about Samsung considering using the Windows 8.1 platform, until the payment ordeal gets resolved, it's unlikely we'll see Samsung release any Windows Phones.The suit is more about setting a precedent than it is about the money, so it won't be easy to resolve.
Both companies have excellent motivation to resolve the issue now. An agreement between Microsoft and Samsung could be mutually beneficial.
Samsung's relationship with Google has become increasingly tense. Google continues to place more restrictions on manufacturers that license Android, forcing them to pre-install up to 20 Google apps. Google is also limiting how much customization phone makers can implement on top of Android, which means Samsung is less able to differentiate its product from the competitors. That lack of differentiation is showing up in Samsung's declining market share.
As such, Samsung might look to Microsoft to offer it an alternative to Android, and at least provide some leverage against Google. Windows Phone suffers from an inability to attract app developers, but is still a better alternative than Tizen. Microsoft is starting to attract more developers, reaching 300,000 apps last June, but still lacks high-quality developers.
One thing that's holding back more developers from Windows Phone is that it has a very small share of the market. Samsung could help with this, as, wanting to wean itself off Google, it could spend billions of dollars marketing Windows Phone for Microsoft. Samsung spent around $14 billion in marketing in 2013, and almost $8 billion went toward smartphone sales promotions -- i.e., salesperson incentives.
Stopping the bleeding
Samsung and Microsoft saw sales of their mobile hardware and software, respectively, decline in the third quarter of 2014. Samsung's sales are being eaten away by Xiaomi and other Chinese manufacturers. Producing more low-price Windows Phones would help it differentiate itself from the other low-price Android phones.
Microsoft saw its device and consumer licensing revenue decline 9% in its fiscal first quarter -- $391 million. The largest part of the decline came from Windows Phone licensing revenue, which fell $176 million year over year. If Samsung started pushing Windows Phone harder, it could mean a billion-dollar turnaround in licensing revenue.
That's certainly worth the companies coming to a resolution on their current licensing dispute.