How Microsoft and Oracle Will Tax Google Android Out of Existence

By Erik Sherman | July 8, 2011

Microsoft (MSFT) has set a $15 a handset Android tax on Samsung to keep legal action at bay, according to a Reuters report. That’s a good deal stiffer a royalty than the $5 to $12.50 price tags previous reported.

Although I’ve written about this before, the Samsung news combined with reports that Oracle (ORCL) is also seeking stiff royalties from handset makers using Android puts the issue into a renewed and glaring light. Mobile is the hottest area of high tech right now, with the possible exception of social networks. The interplay of patent lawsuits and growing success in getting manufacturers to pay royalties shows what the future of Google (GOOG) Android might be: a sharecropper working for the Redmond Man.

Microsoft’s vise

Consumer electronics companies are notoriously sensitive to price, literally working to pare away tenths of a cent from the cost of a unit. It’s because of the volume. When you’re selling ten of millions, a fraction of a penny adds up quickly. For a parallel, look at the PC industry. Even 20 years ago, companies were loath to pay even 50 cents per unit to a software vendor for the same reason.

Microsoft is working a savvy three-way strategy:

Demand royalties from anyone and everyone using Android, knowing that many companies will buckle under to avoid the greater expense of a protracted legal battle, something that Microsoft is notorious for undertaking.
In taking this route, Microsoft creates be a significant revenue stream for itself.
Microsoft can offer to license Windows Phone at or near the cost of the Android royalty and offer its patent infringement indemnification so the hardware company avoids a similar run-in with Apple (AAPL) or anyone else.

For example, according to Reuters, Samsung might get a $5 per unit break if it starts building Windows Phone-based handsets. It would be hard to overstate just how disruptive this strategy could be for mobile in general and Google in particular.

But wait, there’s more

Not that Microsoft is Google’s only worry. According to a NetworkWorld report, Oracle has begun to ask handset makers for a royalty of $15 to $20 a handset, based on the patent infringement suit that Oracle filed against Google over the use of Java.

According to a Deutsche Bank analyst, that sum would be comparable to the cost of licensing Windows Phone. Now add the Microsoft tax on top of it. Suddenly, the free Android costs nearly double the price of a Windows Phone license, let alone Linux, Symbian, or possibly Nokia’s (NOK) MeeGo, since the company would likely want to recoup development costs for a platform it’s tossing aside.

Say for a moment that Oracle is successful. How the devil does Google fight back against these two directions of attack? The only way is to … charge a license fee itself for Android and provide indemnification. Suddenly, the operating system’s biggest selling feature for hardware manufacturers is gone. With it would be Android’s momentum.

The big winners out of all this are Microsoft, which seems more adoption of Windows Phone, and Apple, because its most dangerous competitor gets kneecapped.

Related:

Image: moregueFile user doctor_bob, site standard license.

Related Tags Google Inc., Phone, Handset, Microsoft Windows Phone, Microsoft Corp., Android, Microsoft Windows, Taxes, Cellular Phones, Telecom & Utilities, Operating Systems, Software, Financial Planning, Finance, Consumer Electronics, Personal Technology, Erik Sherman

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RE: Microsoft and Oracle Will Tax Google Android out of Existence

A. If WP7 continues to slide in market share (nearly a 40% decline in US market share for smart phones since last August for Redmond), no amount of extortion will get app developers and handset manufacturers on board, even if it costs the same or higher to produce handsets for Android.

B. It's not entirely clear, with Microsoft getting so much money from Android, that it has any incentive (except pride) to push WP7, when essentially it has to outspend Google to simply catch up. They dropped the Kin without barely trying to make it better.

C. Oracle is stuck in no-man's land, once any offending code is removed from Dalvik...Google would be on the hook for a one-time payment for past infringement, only.

D. While I have lost faith in the US DOJ, FTC and Congress to figure out what's going on, I'm holding out hope that the EU will bring Microsoft's days of extortion and patent troll to a close.

gork platter

07/08/2011 02:19 PM

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RE: RE: Microsoft and Oracle Will Tax Google Android out of Existence

@gork platter WP7 is a new product, so talking about its market share sliding is inaccurate. You could say that about Windows Mobile, but that's not where the company will go. Handset vendors are interested in distinguishing themselves. Android per se doesn't allow them to do it. It's really the hardware design. From that angle, if Android becomes too expensive, they'll simply drop it, and the developers will go where the market goes.

Although Microsoft makes money from royalties, it could probably make more from licensing, and then there are all the potential profits from the ecosystem, plus protecting its position in client systems. The Kin did so badly that it wasn't worth rescuing (and it was ridiculously expensive).

Oracle isn't stuck in no man's land because moving to a really independent code base, if there was infringement, would be a lot harder than it sounds. And if the issues come down to patents, then removing code doesn't fix the problems.

ErikSherman

07/08/2011 06:29 PM

RE: RE: RE: Microsoft and Oracle Will Tax Google Android out of Existence

@ErikSherman "Suddenly, the operating system's biggest selling feature for hardware manufacturers is gone. With it would be Android's momentum." I'm sorry, but this is utter nonsense. Android isn't going anywhere, there is too large of a user base and developer community. People don't WANT WP7 like they want Android phones. I'd say demand for a product is a bigger selling feature than free licensing. Sure, drop Android, go with WP7, watch everyone buy iPhones until you bring back Android.

Google fights back by making Android indispensably awesome. They're doing a damn fine job so far.

thebigmann

07/09/2011 11:37 AM

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RE: RE: RE: Microsoft and Oracle Will Tax Google Android out of Existence

@ErikSherman "Handset vendors are interested in distinguishing themselves. Android per se doesn't allow them to do it." You seem to be forgetting about the custom skins such as HTC Sense. Android allows them to distinguish themselves through the hardware AND software, which is the MOST freedom of any OS. I'm pretty sure every single conclusion you've made in this joke of a blog post is false.

I have a proposition: If you're confident in your assertions and this article isn't just for creating controversy, pick a date in the not-too-distant future when Android will be taxed out of existence. If it is, I will comment and concede that you're a tech genius. If it isn't, you make a follow up blog post that states "I am a short-sighted fool who has no business blogging about anything except beard maintenance."

thebigmann

07/09/2011 03:36 PM

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RE: How Microsoft and Oracle Will Tax Google Android Out of Existence

Guess Google and their partners are learning a fundamental lesson of business (and life, for that matter): there's no such thing as a free lunch. You don't get all that technology that has been created and build up by the millions paid in R&D; by other companies for nothing. If you use someone else's work, you pay them for that privilege. Some, like the commenter "gork platter", will call this "extortion" but do you not believe a company should be compensated for their work and investments in development? Our entire economy is based on that notion. If your company started producing a great, revolutionary product after years of investing time and money in developing it, do I have the right to come along and copy your ideas wholesale and undercut you to make money? I don't think that's the way it should work and I suspect if you were on the receiving end of that, you'd be singing a very different tune.

Andre Richards

07/08/2011 04:30 PM

RE: RE: How Microsoft and Oracle Will Tax Google Android Out of Existence

@Andre Richards these are 'software' patents mainly. They didn't cost millions and years to produce. Most of them are based on previous work too. They're more 'ideas' than real inventions. Claiming millions from these is just robbery and it's killing innovation because a single person or a small company can't afford to pay them.The whole patent system on ideas and software is plain stupid and need to be changed.AFAIK it's not worldwide too, some countries don't have software patents.

kgersen

07/08/2011 07:15 PM

RE: How Microsoft and Oracle Will Tax Google Android Out of Existence

@Andre
Yes all companies do have the right to get back their investment and make a profit. And in an ideal world that is what should happen, but the reality is that these giants on the whole mostly buy in someone elses hard work and repackage it as their own. Microsoft, Oracle, Apple they all do it. And they do buy the patents and copyrighted material. And with that investment. Plus the marketing required to sell their newly acquired products. But some of these companies have been caught doing illegal things in the past, so they're no angels when it comes to sticking to doing the 'right thing'.
As to the entire economy being based on that soley, no it isn't. It is based on conning the consumer into buying something they don't really need. But that's another subject wink

silvryn

07/08/2011 06:29 PM

RE: How Microsoft and Oracle Will Tax Google Android Out of Existence

nice post...

but how can Google stop this...i feel android should remain less costly and more popular? Can we users do something?

What Microsoft is doing is unethical and not customer friendly, they are killing something which people benefits from. They should charge but reasonably.