May 312011
 

Microsoft’s great shining hope (in its eyes) to regain some type of position of prominence in the smart phone marketplace is its Windows Phone 7 operating system.

It has spent who knows how many billions of dollars to developing its new phone OS and getting it accepted by hardware manufacturers (including an amount believed to be multiple billions of dollars to Nokia alone).

To date, subsequent to its October 2010 release, one estimate suggests that Microsoft may have received income in the order of a paltry $30 million from selling OS licenses to hardware manufacturers (2 million licenses at $15/license).  Note this is probably not the same as having had 2 million phones sold at retail.

So it will be a very long time before Microsoft starts to see any measurable return on its billions of dollars invested into Windows Phone 7.

However, every cloud has a silver lining, and in this case, the silver lining comes from an unexpected source – a competitor.  Microsoft has successfully asserted some intellectual property rights infringements in the Android phone operating system, and has negotiated a settlement with one manufacturer of phones – HTC.  This has been getting Microsoft a nice $5 fee for every Android based handset HTC sells.  Since the settlement was reached, it is estimated that HTC has paid Microsoft $150 million (sales of 30 million handsets).  Both the dollar amount and the number of handsets sold both dwarf the numbers applicable to WP7.

So, more or less for nothing except some fancy legal finagling, Microsoft has earned $150 million from its competitor, and will continue to earn additional fees into the future.

But wait – there’s more.  Microsoft is now seeking settlements from other Android based phone manufacturers, and is likely to get even larger fees (up to as much as $12.50 per phone) in the settlements it negotiates.

So – think about it.  Microsoft gets $5 – $12.50 per Android phone sold, with zero cost of sales, zero marketing or promotion, zero development costs, and zero support costs.  On the other hand, it gets $15 per Windows Phone 7 sale, with billions of dollars of sunk costs and massive ongoing costs under all these categories.

If I were Microsoft, I’d be tempted to forget about WP7 entirely (it seems that much of the market already has!) and concentrate on helping Android succeed.  It is a much easier and much more substantial income stream.

Here’s some more background and analysis.

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