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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.

HTC One
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: Xp
By themaster08 on 12/12/2013 5:47:26 PM , Rating: 3
quote:
An alternative that NOBODY is buying outside of the Nokia 520/521 in third world countries?
That's a load of crap. Windows Phone has already broken double-digit market share in some European countries, including the UK, mostly because of the Lumia 520 and 620:

http://www.v3.co.uk/v3-uk/news/2297617/nokia-lumia...


RE: Xp
By Reclaimer77 on 12/12/2013 5:57:09 PM , Rating: 2
Again, that marketshare growth is entirely because of the 520/521, just like I said!


RE: Xp
By themaster08 on 12/12/2013 6:08:14 PM , Rating: 3
The UK is not a 3rd world country.


RE: Xp
By Reclaimer77 on 12/12/13, Rating: 0
RE: Xp
By themaster08 on 12/12/2013 6:34:06 PM , Rating: 5
quote:
Again re-read my statement and go look at the numbers.

Your initial post states that no one is buying Windows Phones, other than in 3rd world countries. Its double-digit market share in some European countries, including the UK, shows that this is simply not true.


RE: Xp
By troysavary on 12/13/2013 1:54:18 AM , Rating: 2
It is useless pointing out when reclaimer77 makes an idiotic statement like that. Every time you do, he just claims he didn't say what he said. He worse than Obama for doing that.


RE: Xp
By JasonMick (blog) on 12/12/2013 6:20:20 PM , Rating: 3
quote:
Again, that marketshare growth is entirely because of the 520/521, just like I said!
Reclaimer a couple points.

First, to clarify I don't necessarily think Android OEMs will switch wholesale.

What I do think is that they'll possibly adopt Windows Phone as a strong second tier, which can fill in, in certain markets (e.g. the U.S.) if bans land. Some OEMs (e.g. Sony) are safe due to preexisting deals.

Are you honestly saying that if, say the Galaxy S3 and Note II are banned next Spring (which I expect it will be, unfortunately) that Samsung won't at least consider switching its entry level U.S. product to Windows Phone?
quote:
Again, that marketshare growth is entirely because of the 520/521, just like I said!
Second, as to this, I find this argument kind of nonsensical, given Android's initial gains were on the low end.

When the HTC Dream/G1 launched it was a nice phone and all, but it was by no means on par hardware-wise with the best from Nokia, Palm, or Apple. Instead it offered a good price and a fresh look.

The key was that first part -- price. Android won market share by first attacking the budget end.

Microsoft is doing this relatively successfully, as it's raised the base price of Android enough with licensing (together with Nokia and Apple) that it's hard to have a competitively priced Android to face off against the 520/521. BlackBerry should go under within a quarter; most of its sales in recent quarters have been BB7 consumer devices in emerging markets(read, not enterprise devices as most businesses are dropping BB).

Microsoft is well positioned to secure most, if not all of this business.

################################

I expect Microsoft to pick up some of that business on the high end, as well.

And now that it/Nokia (+ Apple) have pushed HTC into money losses, HTC should either switch to Windows Phone or go under. Either way Microsoft should gain sales.

Samsung won't switch to Windows Phone wholesale (or at least it's very unlikely), but depending on lawsuit outcomes it is likely to at least launch some U.S. Windows Phone product.

Samsung's Androids will of course continue to sell strong as will Apple iPhones (and likely LG Androids). I expect Sony's durable Androids and ASUSTek's smartphone/tablet transforming "FonePads" Androids will see decent sales as well.

But I think Microsoft will continue to grow sales-wise, simply because it offers a good product, has greater differentiation for those wanting something different, and also is playing very dirty in the patent game, and slowly succeeding.

################################

But hey, whatever, I'm sure Microsoft would be fine if you're right and Android continues to dominate. It makes more off Android still. Heck, it's expected to get a few billion in licensing fees from Samsung alone this year.


RE: Xp
By Reclaimer77 on 12/12/2013 6:40:14 PM , Rating: 1
quote:
Are you honestly saying that if, say the Galaxy S3 and Note II are banned next Spring (which I expect it will be, unfortunately) that Samsung won't at least consider switching its entry level U.S. product to Windows Phone?


How about we NOT allow product bans and patent trolling to rule the day?

This is what people don't understand about why I have such a big issue with Windows Phone. It's because Microsoft didn't fight Apple! They sided with them, formed an alliance with them, and teamed up against Android OEM's. I will NEVER forgive them for that. They didn't try to compete on their own merits, they didn't care to make a better product. They just went straight into anti-competitive Apple-styled bullying of the competition.

It's almost like you guys are cheering for this, as long as it benefits your favored platform. Ugh!

quote:
Android won market share by first attacking the budget end.


I don't think Android gained any recognition until Samsung's Galaxy S, which was decidedly not low-end. I'll concede your point that the low-end played a role, no doubt.

But that was then. The market is more matured now. iOS is already at critical mass. Android is still growing, though not as rapidly as before. How much room to grow does Windows Phone even have at this point?

quote:
it's hard to have a competitively priced Android to face off against the 520/521.


Why would anyone want to? There's no money to be made selling an $80 phone. The margins are razor thin.

quote:
And now that it/Nokia (+ Apple) have pushed HTC into money losses, HTC should either switch to Windows Phone or go under. Either way Microsoft should gain sales.


Hooray!! Let's not win on the merits of our products and marketing. Let's just sue and bully and anti-trust our competition out of business! WOO HOOO!!! GO WINDOWS PHONE.

sigh...

quote:
But hey, whatever, I'm sure Microsoft would be fine if you're right and Android continues to dominate. It makes more off Android still. Heck, it's expected to get a few billion in licensing fees from Samsung alone this year.


The fact that the only money Microsoft has ever made off Windows Phone has been from patent trolling and "licensing", speaks volumes about the state of Windows Phone and how "good" of a product it is.


RE: Xp
By troysavary on 12/13/13, Rating: 0
RE: Xp
By Reclaimer77 on 12/13/2013 7:55:22 AM , Rating: 2
You don't get it even after I spell it out. It has nothing to do with Google and everything to do with buddying up with Apple.

In case my post history didn't clue you in, I hate Apple far more than I respect Google.

If MS stood on their own and competed honestly and fairly, I could respect that. I even supported Windows Phone early on, until they began trolling and bullying.


RE: Xp
By retrospooty on 12/13/2013 8:19:54 AM , Rating: 2
"In case my post history didn't clue you in, I hate Apple far more than I respect Google"

I have to back up Reclaimer on that one... The only thing he hates more than Apple is liberals and its a close 2nd.


RE: Xp
By Reclaimer77 on 12/13/2013 10:18:11 AM , Rating: 2
And Steve Martin.

Don't ask :)


RE: Xp
By retrospooty on 12/13/2013 10:48:29 AM , Rating: 2
The thought of Steve Martin the liberal Apple fanboy must make you cringe.


RE: Xp
By Monkey's Uncle on 12/13/2013 11:01:35 AM , Rating: 1
Yeah, dem dam Librls! Shoot 'em all!


RE: Xp
By Spuke on 12/12/2013 6:55:59 PM , Rating: 2
I'll be one of the last hold outs on Android.


RE: Xp
By Reclaimer77 on 12/12/2013 7:17:39 PM , Rating: 2
I won't buy a computer where I don't have control of my device.

Smartphones are computers now, so ditto for them too.

Even if Google goes out of business, even if every hardware vendor closes their shops, there will STILL be millions of people running custom Android ROM's on their smartphones and making apps.

Apple and Microsoft are only interested in locking you into their walled garden. I would rather go back to a flip-phone before I supported that.


RE: Xp
By retrospooty on 12/12/2013 7:22:43 PM , Rating: 2
Exactly. Windows was open and became just a bit of a hit. Android is open and also is a bit of a hit, So.... MS changing everything for mobile makes sense how?


RE: Xp
By Monkey's Uncle on 12/13/2013 11:18:54 AM , Rating: 2
Windows gained popularity simply because they did not restrict licensing to a single hardware platform. That is because Microsoft is primarily a software company. Microsoft quickly realized that if they let third party hardware vendors license their software and published the low level interfaces needed to create drivers and applications, they would get huge amounts of revenue from selling a generalized operating system.

This differs from Apple's insistence on only strictly licensing their software on their own hardware. Sure there have been 3rd parties that tried to create apple boxes, but the legal hoops they had to jump through along with the expensive & very restrictive licensing meant these dried up almost as fast as they showed up on the market.

That said I doubt Microsoft would behave much differently than Apple if people tried to start cloning the Xboxes. Those are a whole other kettle of fish.


“Then they pop up and say ‘Hello, surprise! Give us your money or we will shut you down!' Screw them. Seriously, screw them. You can quote me on that.” -- Newegg Chief Legal Officer Lee Cheng referencing patent trolls














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