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How Microsoft and Oracle Will Tax Google Android Out of Existence

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:

  1. 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.
  2. In taking this route, Microsoft creates be a significant revenue stream for itself.
  3. 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.


Image: moregueFile user doctor_bob, site standard license.
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