If a customer getting cozy with a rival is bad news, then Google (GOOG) had a depressing week. First, top Android hardware vendor Samsung caved to Microsoft (MSFT), agreeing to pay royalties while it talked up Windows Phone. And now, another Android star, HTC, has begun to sing the praises of Windows Phone, noting that it represented 30 percent of the company's overall unit sales since it launched last year.
Windows Phone is in no place to usurp Apple's (AAPL) position as having the second most popular mobile operating system, let along Google's number one place. But this has got to be disturbing news for management at Google. Two of its most successful hardware partners plan to diversify their use of operating systems. Between threats on the patent side and offering a legally-defended alternative, Microsoft had already found a combination of tactics to pry device manufacturers away from their embrace of Android. And Microsoft has Google to thank for the success.
Going for a win, any way it can
Many of the various mobile fan clubs bitterly complain when one company gets the better of another means other than product design and mass appeal. A word to the wise: Get used to it. Corporations use whatever tools at hand to win. Look at Apple's various tactics to compete with Google.
Microsoft has been so far behind both market leaders, given the late arrival of Windows Phone, it might as well have stayed in 2002. But the company wasn't about to give in and it has clearly targeted Android as the more vulnerable of the leaders.
The company's general counsel, Brad Smith, said, "So far we have not seen a single Android device that does not infringe on our patents." Here's the translation from Lawyer to Business: "We've never seen an Android patent infringement lawsuit we didn't like."
The list of Android hardware vendors that Microsoft has convinced (OK, strong-armed) to pay royalties and avoid legal action is impressive. They include major Android device manufacturers selling in the U.S., with some notable exceptions: Barnes & Noble (BKS); Amazon (AMZN), which will come under fire because of its upcoming Kindle Fire tablet, and Motorola, which Google is buying.
The let-us-make-you-an-offer-you-can't-refuse approach has begun to pay off in two ways. Even though Windows Phone has been on the slow track for consumer acceptance, it's moving in the right direction. HTC's figure that WP represented close to a third of its unit handset sales is not easily dismissed, and Nokia (NOK) probably considered legal hassles among other factors when deciding between Windows Phone and Android.
Microsoft has also built some real revenue out of the tactic. Analysts at Goldman Sachs estimate that Microsoft will see $444 million in royalty revenue for the fiscal year that ends next June.
Where were you when we needed you? Oh, with Moto
Even though Microsoft has the resources to push on the legal front, its success owes less to what it has done and more to what Google hasn't done. Android doesn't come with indemnification for the hardware vendors that use it, unlike Windows Phone from Microsoft. That left vendors paying for their own legal defense or any settlement like royalties.
That meant Android suddenly had a hefty price tag when the lawsuits began, evaporating the advantage of a "free" operating system. And then, just when things were troubling enough, Google decided to buy Motorola Mobility (MMI) and gave a big present to Microsoft. Why would a Samsung or HTC take risks when Google was about to buy one of their biggest competitors?
If being a good friend means offering the shirt off your back, then from Microsoft's view, Google must be striding bare-chested through the mobile industry. In its quest to change the dynamics of the mobile space, Google chose a strategy that looked compelling, except it also planted the seeds of its own potential destruction.
Executives often look at strategic choices in too limited a way. Plans don't have only direct financial consequences. The indirect implications can have a nasty economic backlash.
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