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Thanks to Microsoft, Apple, Nokia lawsuit/licensing triple team, OEMs might be tempted to take the deal

The Verge is citing "sources familiar with Microsoft's plan" as saying that Windows Executive Vice President (EVP) Terry Myerson is considering offering Windows RT and Windows Phone for free.  The move could be a game changer for Microsoft, which is struggling in key mobile markets including budget laptops, tablets, and smartphones.
I. Free at Last?
Some viewed Microsoft's decision to offer free upgrades to Windows 8.1 for Windows 8 users as a shift in direction; others argued that the release was analogous to a service pack, which Microsoft has traditionally released for free.
Needless to say, offering an operating system to OEMs for free would be a far greater seismic shift for Microsoft.  The "official" MSRP is $120 USD for Windows RT, but the rates that Microsoft sells it to OEMs at are individually negotiated.  According to a report by VR-Zone in mid-2012 Microsoft was asking $80-95 USD per license (with the median asking price around $85 USD) for Windows RT tablets.  Following poor pickup of Windows RT, Microsoft reportedly cut licensing fees to $30-45 USD by June 2013, according to reports by ComputerWorld and The Wall Street Journal.

Windows Phone license
Microsoft current charges anywhere from $5 to $30 USD per Windows Phone license.

In Jan. 2012, Chinese phonemaker ZTE Corp. (SHE:000063) revealed in an interview with TrustedReviews (UK) that Microsoft was charging between $20 and 30 USD per Windows Phone 8 license.  Larger OEMs have been rumored to get more favorable deals; Reuters reported in June 2011 that Samsung Electronics Comp., Ltd. (KSC:005930) (the world's biggest smartphone maker) was paying only $10 USD per Windows Phone license.
Aside from ZTE's apparent tip, the closest to confirmed licensing rate info we have on Windows Phone comes from financial filings from Finnish phonemaker (and Windows Phone maker) Nokia Oyj. (HEX:NOK1V).  While there was a two-way flow of money between Microsoft and Nokia (Microsoft paid Nokia around $1B USD to use Windows Phone over Android), the net direction of the flow was to Microsoft.
Microsoft's Terry Myerson
Windows EVP Terry Myerson is considering free licensing to consumers to drive sales of mobile Windows product.

A 20-F filing by Nokia for fiscal 2012 revealed that Nokia was expected to pay Microsoft €500M ($688M USD) more than it received through the end of 2016.  Given that Nokia shipped 7m Windows Phones in Q1 20137.4m in Q2, and 8.8m in Q3, that works out to something in the neighborhood of 32-35m expected sales for 2013.  Assuming no growth (an unrealistic assumption, as Nokia doubled its Windows Phone sales from 2012 to 2013), sales should work out to 125 - 150 million units through 2016.  That's about $5 a license -- at most -- likely even less (of course, Nokia's devices unit later would be sold to Microsoft scrapping that deal).
But in October the rumor mill was buzzing following a Bloomberg report that Microsoft offered HTC Corp. (TPE:2498) free Windows phone licenses, if it commits to a large volume of handsets (perhaps exclusivity).
II. Why "Free" is Good for Microsoft's Bottom Line
In Q3 market analysis form Interactive Data Corp. (IDC) indicated sales of 8.9m Windows Phone units (indicating Nokia accounted for basically all of the platform's sales).  Windows RT -- the version of PC Windows that runs on CPUs bearing ARM Holdings plc's (LON:ARM) titular licensed architecture -- moved 200,000 units in Q2 2013 (about half a percent of the 51m+ tablets that were sold in Q2).  It's safe to assume that Q3 sales were bad or worse, given that some OEMs bailed on Windows RT with the launch of Intel Corp.'s (INTC) Bay Trail platform.

Windows RT
Windows RT sales are basically nonexistent.  [Image Source: TalkVietnam]
So Microsoft’s net loss in revenue had it offered Windows Phone and Windows RT for free to OEMs would have been around $50M USD -- a drop in the bucket for a company that made $5.24B USD last quarter in net income.
As the fall of RIM/BlackBerry demonstrated, it's absolutely vital to stay relevant in the mobile consumer market, in order to stay relevant in the enterprise market.  So it's a smart move for Microsoft to sacrifice roughly 1 percent of its net earnings if that expenditure will gain it ground in the mobile market.
That brings us to a final point -- will it work?
III. Will OEMs Quit Android to Save Money?
Currently there's only one major alternative to the Windows OS family in terms of a third party platform -- Google Inc.'s (GOOG) Android OS.  Likewise on budget laptops the only widely adopted alternative is Chrome OS.  Chrome OS and Android are "free" to OEMs in the sense that Google doesn't collect license fees and offers to share advertising revenue with the OEMs.  However, these operating systems aren't truly free in the long run.
Microsoft has already scored licensing agreements from most Android OEMs, which typically fall in the $5-15 USD range.  Apple, Inc. (AAPL) seems to prefer to simply exclude competitors from the market, but it too will license in some cases (e.g. HTC).  Either way this is yet another cost that is borne by your device sales.  Lastly, there's Nokia, who arguably has the strongest patent portfolio in the industry.  Nokia is trying to squeeze yet a third licensing fee from OEMs.

Provisional patent
The Innovation Act does offer some positive patent reform. [Image Source: InvestorsEye]

The question is whether a free Windows OS would be cheaper.  You know with certainty that Microsoft won’t sue you, so that reduces your potential licensing fees to payments/lawsuits costs with Apple and Nokia.  Further, you're safe from most software patents, as Apple and Nokia have committed to licensing agreements with Microsoft.
Thus the only expense you have is potential payments on hardware infringements or infringements on design patents.  As the Nokia v. HTC conflict shows, this can still be an issue -- particularly if you buy your chips in jurisdictions where licensing deals from chipmakers don't transfer to their customers (e.g. Taiwan).  However, even if Windows Phone/Windows RT OEMs are forced into small licensing fees regarding hardware patents or small redesigns to escape design infringement claims, this still will likely be half what a top Android OEM today is paying.

The Nokia, Microsoft, and Apple patent licensing/lawsuit triple team may make the "free" Windows Phone the only financially feasible option for some OEMs, like HTC. [Image Source: NeoWin]

If Chrome OS continues to see sales success, expect at least Microsoft to start to demand similar fees from device makers.
And if H.R. 3309 Innovation Act of 2013 [PDF] -- the "Innovation Act of 2013" -- makes it through the Senate and is signed into law, that scenario could tilt even further in Microsoft favor, as it could intercede and take over some patent disputes.
Simply put together Microsoft, Apple, and Nokia are triple teaming phonemakers.  This approach may eventually make getting the licenses necessary to sell a smartphone or tablet so expensive that Android becomes financially infeasible for top OEMs.  And now Microsoft deftly maneuvering to position itself as a seeming knight in shining armor, and offering "free" licensing -- if you use its OS.
Smaller Android OEMs who might be under less legal pressure invariably will have to weigh these financial benefits against the cost of redesigning for a new operating system and the cost to users of having a more limited app selection.
But overall free licensing could be a game changer to Microsoft's mobile campaign, and help Microsoft sustain profits in the long term in the enterprise sector, which current drives most of its revenue.

Source: The Verge

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RE: Inflection point?
By Argon18 on 12/12/2013 5:05:35 PM , Rating: 2
"In order for those cash cows in enterprise to disappear, there has to be a competitor with a replacement and there is none. There are a few with a few tiny pieces but no true competitor. There isnt even a close 2nd. There are zero other players at all that do what MS does."

That's incorrect.

SQL Server has plenty of competition in Oracle, MySQL, and Postgres. The only reason to choose Microsoft SQL is if you're stuck using the Windows OS. Linux and Unix offer much more robust database alternatives.

Visual Studio, the only compelling reason to use it, again, is if you're stuck using the Windows OS. Nobody uses Visual Studio to develop for other operating systems. Ditch Windows, and you no longer need Visual Studio.

Windows OS is a crufty poor excuse for a general purpose server. It sucks at file and printer sharing, it's incredibly maintenance intensive with the constant patching and rebooting, and nobody uses it for general internet services. Apache on Linux owns the majority of the internet for Web servers. IIS has nothing on Apache. So once again, the only reason to use the Microsoft product is if you're stuck in a Microsoft ecosystem.

Office is Microsoft's only prize at this point. And the only reason there are no serious competitors, is the proprietary file formats. LibreOffice is pretty damn excellent now with the current 4.1 version. But nobody is going to invest seriously in developing a competitor so long as the business world is stuck on using these proprietary Microsoft document formats. Microsoft knows this, and is using it to maintain their monopoly. As soon as the business world decides to use the Open Document formats instead, MS Office is a gonner.

RE: Inflection point?
By retrospooty on 12/12/2013 5:25:12 PM , Rating: 2
LOL. Good luck with that wish. It's not happening. Yes, it could happen , but no-one is picking up the burden. Just small one offs.

RE: Inflection point?
By 91TTZ on 12/12/2013 5:46:03 PM , Rating: 2
SQL Server has plenty of competition in Oracle, MySQL, and Postgres. The only reason to choose Microsoft SQL is if you're stuck using the Windows OS. Linux and Unix offer much more robust database alternatives.

Even if you are stuck using Windows, you can still use MySQL and Oracle.

RE: Inflection point?
By Mitch101 on 12/12/2013 8:10:16 PM , Rating: 3
MySQL is good for startups to mid size but no way shape or form competes on the big stage. I love MySQL I use it all the time but its not a major player. If your doing a startup by all means MySQL is the way to go. We use MySQL on Windows Servers and Linux. The administrative overhead costs of using it on Linux aren't always worth it over the cost of a Windows Server License. Sorry but Linux Admins are more costly because its more of a specialty than Windows Admins.

Why would anyone want to ditch Microsoft Visual Studio? The product is phenomenal even the free versions of development tools from Microsoft are excellent. Why would you want it to develop for other platforms? BTW it does work for PHP coding.

There is no comparison on education Microsoft gives away tons of free development tools. Good luck even finding 30 day evals of competitor products where Microsoft gives away 90, 180, 365, and even full licensed products they never expire. I once tried to re-learn Lotus Notes and damn if I could get a trial product much less any training without spending thousands of dollars but anyone can learn a Microsoft product for pretty much free. Microsoft bar none has the best documentation and free training material out there nothing comes close. This is brilliance you want people to be able to use your product offer free documentation, eval copies, training, and seminars.

Currently SAP and Oracle have a leg up on Microsoft SQL but that will change in 2014/2015 when Microsoft releases Heckaton along with PDW, Polybase, PowerPivot, Power View and X-Velocity, which will blow away SAP's Hana and Oracle's Exadata. For the first time Microsoft will really leap ahead of them and be wearing the big boy pants.

Office is not just Office its an ecosystem its way beyond creating a document or spreadsheet and you left out Project Server and SharePoint. SharePoint being one of the fastest growing Products ever for Microsoft. Active Directory is also a major item. While Office is a big money maker for Microsoft they make a lot more products than the ones we mentioned that are profitable.

Apache has dropped 10% in the last year while IIS has grown 6% in the last year. Azure is starting to take hold and built into the next Windows Service pack is a few more surprises for web security cough UAG cough. But because its Apache doesn't mean its on Linux I know of a lot of Apache web boxes that are Windows servers now.

Most Windows Eco systems are plagued with Bad admins or doing dumb things like using IBM to patch Windows systems and forcing in patches that are not necessary.

Oracle has tried to compete with Microsoft on e-mail and failed miserably.

With Clustered environments and Load balanced systems patching is not an issue as there is no down time unless you do something stupid. Patching is not an argument its an excuse and if you have downtime then your doing it wrong.

I think Adobe formats were open. I also wish Yahoo and AOL followed Rich Text Formatting standards instead of making their own.

RE: Inflection point?
By Labotomizer on 12/12/2013 9:39:41 PM , Rating: 4
But his company has 122 Linux servers!

I think you really nailed this one and ultimately it's what retrospooky has been trying to say all along. It's not Office, Windows Server, Windows Client, Visual Studio, Exchange, SQL, etc. It's the fact that you can get ALL of that from one vender that is all built to work together.

You can piece together solutions from other vendors. I'd even argue that, given enough money and technical expertise, you could piece together better solutions in most cases. The problem is that you will spend far more in technical development, administration and troubleshooting then you would spend on Microsoft licensing. And THAT is why MS is so strong in the enterprise.

It's easy to think "Wow, this software is expensive, why don't we use free?" until you actually put a cost on free.

As for the major content providers of the world using Linux, yes, that makes sense. Linux is customizable. That gives it a huge advantage when building out very large scale, very custom applications where you have a lot of resources to support and build it. Same for super computers where they're tailoring the OS to the application each and every time.

Microsoft's total package isn't all best in breed. But I would argue some of their products are and those advantages combined with the integration with all the other pieces make it a very, very compelling solution.

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