Joff Wild

The news that Microsoft had signed up Taiwanese company Hon Hai Precision (parent company of Foxconn, producer of 40% of the world’s consumer electronics) came just a couple of days before the company announced its third quarter results. These showed an 18% rise in revenues to just over $20 billion, with profits standing at $6.05 billion – an 18.5% increase.

As with the other Android-related deals that Microsoft has done (there are 19 of these now, all helpfully listed by Florian Mueller on his FOSS patents blog), the details of the agreement have not been released. However, the press release announcing it does state: “The parties indicate that Microsoft will receive royalties from Hon Hai under the agreement.” This is also pretty usual for the licensing tie-ups that the company does with Android – money is almost always involved.

Because the terms are not made public and because Microsoft does not seem to specifically allocate patent licensing revenue on its balance sheet, it is not possible to know just how much is pouring into the coffers at Redmond from Android; but it’s probably safe to assume that it’s not an insubstantial amount. A couple of year’s ago, Goldman Sachs was forecasting 2012 Android-related licensing deals would generate $444 million for Microsoft in FY 2012; while last August, analysts Trefis were claiming that the company could be making quarterly royalties of close to $800 million from Samsung and HTC alone. On a yearly basis that would be over $3 billion!

Of course, when compared to Microsoft’s annual revenues of more than $73 billion in 2012, $3 billion is not a huge amount. But here’s the thing: general wisdom has it that because in the great scheme of things it is not hugely expensive to run a successful licensing operation, the vast majority of the sums that one can raise from one head straight to the profit line. When you look at Microsoft’s profits, which in the last financial year totalled just over $28 billion, even $1 billion becomes a reasonably significant figure; while, say, $3 billion represents over 10%. Like I said, because we do not have the real amounts and allocations, we cannot be certain about any of this; but I would be very surprised if patent licensing were not a pretty tidy 10 figure business for Microsoft these days- and, quite possibly, the most profitable one it owns.

UPDATE: On 23rd April, Microsoft announced that it had signed up ZTE as its 20th Android/Chrome licensee. Slightly unusually, there was no press release to accompany the news, instead CIPO Horacio Gutierrez penned a piece for the Microsoft on the Issues blog. Gutierrez made no mention of any royalty payment that the Chinese company might be making, instead he stated: "Under the agreement, Microsoft grants ZTE a license to Microsoft’s worldwide patent portfolio for ZTE phones, tablets, computers and other devices running Android and Chrome OS." However, for ZTE not to be making a royalty payment you would have to assume that it holds a bundle of patents which it has cross-licensed to Microsoft and which are so important that they trump any monetary demands Microsoft might have made. If that is the case, that is a pretty big deal. But it is unlikely. Another possibility, I suppose, is that looking at ZTE's position in the Chinese market and its potential for expansion elsewhere in the world, Microsoft has made a strategic decision not to go after royalties; instead figuring that goodwill will create a lot of value further down the line. The most likely scenario, however, is that Gutierrez just did not mention the royalties. For some reason Microsoft is much more comfortable talking about what it pays out in licensing fees ("we have paid others more than $4 billion over the last decade to secure intellectual property rights for the products we provide our customers"), than it is in talking about how much it has received!