Jack Ellis

A significant nugget of information was included in Microsoft’s third-quarter financial results, which were announced by the company today:

Windows revenue decreased $292 million or 7%, mainly due to lower revenue from patent licensing and Windows OEM. Patent licensing revenue decreased 26%, due to a decline in licensed units and license revenue per unit.

Microsoft does not release lined-out licensing numbers, but some have estimated that the company could be making as much as $6 billion each year from monetising patent assets that it claims are read on by Google’s Android operating system. That figure is likely to be way too high - more realistically, at its height it was probably in the region of $2 billion to $3 billion - but whatever way you look at it, for Microsoft a 26% declne in patent income is going to represent a significant chunk of change.

Former Microsoft IP head and general counsel Horacio Gutierrez – who announced his departure last month to assume the GC role at Spotify – oversaw a patent licensing programme that became an important source of income for the company. It struck a string of licensing deals with mobile device vendors whose products feature Android software, with most of the resultant revenues heading straight to its bottom line - or back into R&D spend. More recently, under the leadership of new IP head Erich Andersen, the company has become more interested in win-win patent-plus and technology-based agreements, with Andersen telling IAM in a recent interview: "Increasingly, we are focusing on collaborations and partnerships that involve business elements to them as explicitly part of the licensing discussions with other parties.”

Now that many of the major players on the global front have taken Android-related patent licences, and the general licensing environment has become more challenging in the US, that makes sense, especially as it also fits nicely with CEO Satya Nadella's strategy of building a business with a kinder, gentler approach. But that may not be the full story. "The mix of devices in that market has shifted to the low end," Chris Suh, Microsoft’s general manager of investor relations, is quoted as saying of the smartphone space by Business Insider. Suh also mentioned that there are Android manufacturers that are yet to take a licence to Microsoft’s portfolio.

Insider interprets those two statements combined as a reference to the Chinese and Indian companies that have mushroomed in recent years, selling cut-price, Android-based smartphones to consumers in lower income markets. In perhaps the most extreme example, Delhi-based Ringing Bells claimed to offer a smartphone for the equivalent of just $3.65, a price which makes it seem unlikely that any workers in the supply chain are being anywhere near properly recompensed – let alone that relevant patent licence fees are being paid. These jurisdictions are often typically viewed as being challenging when it comes to IP rights protection; and as a result, many companies have largely overlooked them as venues in which to enforce and license their assets.

Nevertheless, some of the biggest telecoms and wireless device patent owners are beginning to take a more determined approach. In India, Ericsson has notched up several successes in enforcing its standard-essential patents, having been handed an injunction against China’s Xiaomi and secured favourable outcomes against Indian smartphone vendors iBall, Intex and Micromax. NPE Vringo, which holds a significant telecoms portfolio, obtained injunctions from the Delhi High Court, assisting in its drive to get Chinese giant ZTE to take a licence.

In China, Qualcomm seems to have been steadily signing up or renewing licensees from among the country’s manifold device makers, including ZTE, TCL, Xiaomi, Lenovo, Haier, Tianyu, affiliates of Coolpad and Gree Electric and, most recently, Hisense.

However, before Qualcomm was able to achieve any of this it was subject to a far-reaching antitrust investigation by China’s National Development and Reform Commission, which resulted in it being fined $975 million and – probably even more frustrating to the company than the monetary penalty – having substantial restrictions placed on its future licensing activities in the country. In India, Ericsson now faces an antitrust probe after Intex and Micromax complained to the country’s Competition Commission.

Microsoft is already the subject of an anti-monopoly investigation in China regarding software compatibility, bundling and document authentication issues; while the signs suggest that India’s competition watchdog is also becoming much more interested in patent-related business. If Microsoft is planning on revitalising its Android revenues by launching patent licensing campaigns in China and India any time soon, then it will no doubt be keeping a very watchful eye on how these situations develop.