

Microsoft makes 5 times more income from Android than from Windows Phone - woobar
http://www.asymco.com/2011/05/27/microsoft-has-received-five-times-more-income-from-android-than-from-windows-phone/

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raganwald
The business model for charging for operating systems is going to go away
thanks to patents. Why try to charge royalties for an OS when you can simply
collect rent? Google give Android away because it's in their interest for
handset makers to have an OS that isn't distributed by the people who own
Bing. But why should Microsoft even bother with Windows 7?

~~~
scottdw2
The answer is simple: "Disruption".

Smartphones are disruptive to the PC industry. In fact they are a canonical
example of disruptive innovation. A phone is nowhere near as good as a PC, but
it's cheaper and more convenient. It fits in your pocket and gives you instant
access to your data, no matter where you are.

The margins for smartphone software, thanks largely to Apple, are much smaller
than the margins for desktop software. In fact, you could see the promotion of
$0.99 software via the app store as a strategic move by Apple to coerce
Microsoft into not pursuing mobile software.

That's a typical move by a disruptive innovator, to focus on low-margin low-
end segments of the market, which a dominant incumbent is generally motivated
to walk away from, preferring instead to focus on high-end high-margin
products.

The 30% fee Apple charges push margins even lower.

In some ways, this is working. There is no version of Microsoft Office for the
IPad or the IPhone, for example. Some of this is likely due to the fact that
Microsoft's application software business is being disrupted from multiple
sources (there is a web version of Office). Both Google and Apple are pushing
desktop office in the same direction that Toyota pushed GM : toward SUVs.

Apple also has a strong motivation to commoditize mobile software because it
has major positions in several complementary markets: Hardware Sales, Music
sales, Video Sales, and Application Delivery (the app store).

If Microsoft doesn't compete, fiercely, in both mobile and web their fate will
end up being very similar to both General Motors' and DEC. Windows Mobile 7 is
a first step in this direction. It's not sufficient, they should be selling
mobile versions of Office too, but it's a fist step.

I would say that Microsoft's efforts to collect Android patents are really an
effort to reduce the margins handset makers can extract from sales of Android
phones. It's not meant to serve as a profit center for the company.

In any case, Microsoft's introduction of Windows Mobile 7 serves several
purposes:

1\. It pushes a business model that commoditizes hardware, rather than
software.

2\. It makes it more difficult for their competitors to displace Microsoft's
enterprise business. If they don't release their own mobile OS and mobile
Apps, then it's only a matter of time until that happens.

See the following for more info:

<http://www.youtube.com/watch?v=nJ7EG58J5eo>

~~~
raganwald
I find your comment interesting, however I do not agree that "Pushing a
business model that commoditizes hardware, rather than software" is
compelling. Google is already doing that, so Microsoft doesn't need to sell
Windows 7 to achieve this goal.

I also wonder if your statement that "If Microsoft doesn't compete, fiercely,
in both mobile and web fate will end up being very similar to both General
Motors' and DEC." I agree that it is in danger of irrelevance, but I am not
convinced that Windows 7 is the right way to compete in mobile. I can't think
of anything better, but that doesn't mean that Windows 7 is the right thing to
do.

I am reminded of the politician's fallacy:

"We must do something. This is something. Therefore we must do it." But doing
the wrong thing is worse than doing nothing at all.

~~~
scottdw2
The best thing to do would be for them to disrupt themselves. Apple does that.
Historically Microsoft has shied away from "canabalizing its existing
businesses". Netdocs is a famous example. It's much better to own the
disruptions rather than allow your competitors to do it. If someone at
Microsoft can invent disruptive technology then someone outside Microsoft can
do the same thing. It's better for Microsoft to get that money then Apple or
Google.

Accomplishing that, however, would require a cultural revolution within the
company. I would argue that they should have groups inside Microsoft dedicated
to continuously disrupting their existing businesses. That's the only way they
can stay in front of people like Apple or Google. That would effectively
convert "disruptive innovation" into "sustaining innovation". Sustaining
innovation favors the incumbent. You could also look at it as a form of "meta-
disruption", as it would disrupt the act of disruption.

Is "Windows Mobile 7" the best response? Perhaps not. The ideal response would
be to disrupt the smartphone market all together. You could see the purchase
of Skype providing potential for this (whether or not that's their intention
is a separate question). Producing a "carrier free smartphone" would be a good
example. That's not easy to do. It requires ubiquitous access to free internet
services. It would take a long time. There are high fixed costs. There may be
better options.

I think Windows Mobile 7 makes sense as an interim step. It provides a battle
ground to impeded progress while they gear up for the real fight. Think of it
like the Allied North African campaign during WWII.

~~~
kenjackson
_The best thing to do would be for them to disrupt themselves. Apple does
that._

When has Apple done that? Apple has never had a market until the iPod that was
large enough to be cannibalized. But they've never actually cannibalized the
iPod/iPhone/iPad market.

Now pushing webapps over their appstore would be cannibalizing iOS. But simply
shipping improved products isn't cannibalizing.

~~~
scottdw2
The IPhone disrupts the IPod and the IPad disrupts the Mac business.

The IPad is not just an "improved product". It's disruptive.

~~~
kenjackson
The iPhone doesn't disrupt the iPod. It's a more expensive, more powerful item
with broader reach. It would be like saying the PS3 disrupts the PS2.

One might argue that the iPad disrupts the Mac business, but to be disrupted
you must command a market. The Mac doesn't. The iPad in its second quarter
outsold the Mac (while the Mac sales grew). The iPad may disrupt the Windows
or PC market, but not the Mac market.

In general what you're describing is not how disruptive products work.
Disruptive products cannibalize profits in the medium-term with cheaper
alternatives, but in the long-term win out. The iPhone and iPad don't qualify.

~~~
scottdw2
I'll concede the IPhone bit.

But the iPad is disruptive. You don't have to dominate a market to be
disrupted. You only need to be upset by a "not as good, but more convenient"
low margin alternative. That is the iPad.

~~~
kenjackson
No,the market share is important. Why? Because what's key in a disruptive
technology is that it creates a situation where you have a hard decision to
make. The reason it is the innovator's DILEMMA is that the company realizes
that if this disruptive product suceeds they probably, in the medium-term,
lose a lot of money. But its necessary for long-term survival, but doesn't
guarantee it.

The iPad is a no-brainer. If it does well then Apple does really well. There's
no dilemma. It has good margins and out the gate better sales than the Mac. No
one at Apple stomped their fist on a table and said, "If the iPad does well,
that may spell the end of this company! We can't afford to do this ipad Steve,
it's not in our best interest." No one can make that argument.

With disruptive technologies you can make that argument. In fact the argument
is typically so compelling that it wins.

~~~
scottdw2
I disagree, completely.

1) The iPad is not a no-brainer. Far from it. Apple is a public company, with
billions of dollars of revenue and many short-term focused investors it needs
to satisfy. The same pressures of "profit maximizing resource allocation"
apply to Apple that apply to Microsoft. If apple sells iPads entirely at the
expense of Macs, it could go out of business. Someone very well could have
made the argument that it would destroy the company.

2) Disruption is about building "more convenient" but "not as good"
innovations that target low margin segments of the market. It's not about the
% of the market that the largest incumbent holds. You can disrupt an industry
with 9 players with 10% of the market just as easily as you can disrupt an
industry with 1 player with 90% of the market. For Google to sell netbooks is
a no-brainer (they don't disrupt any of Google's existing businesses). For
Apple to sell iPads is gutsy.

~~~
scottdw2
Checkout Microsoft's last quarterly report:

[http://apps.shareholder.com/sec/viewerContent.aspx?companyid...](http://apps.shareholder.com/sec/viewerContent.aspx?companyid=MSFT&docid=7885827#D10Q_HTM_TX162483_3)

The "Microsoft Business Division" (which includes Office) had 5.266 Billion in
Revenue, out of 16.428 Billion in total revenue. That's 32% of revenue.

Apple disrupting Mac sales is roughly equivalent to Microsoft disrupting
Office sales.

It's a big deal.

~~~
kenjackson
Disrupt Office with what? A cheaper, but significantly higher margin version
of Office that has broader appeal? That's not disruptive. That's a smart
business move.

Or is it a free web version of Office that has no current revenue model? Also,
what is the trajectory of Office revenue? Is it a growth area or stable? In
the case of OSX it is a MUCH lower percentage of revenue as compared to 3
years earlier.

Disruption requires the cannibalizing product to impact the bottom line
negatively. The iPad has had the complete opposite effect from the first day.

If MS shipped a product that on day 1 resulted in higher earnings than Office,
that's not disruptive.

But I think we can agree to disagree about if the iPad was a bold gutsy move.
I think it was a natural progression from the iPhone and cannibalizing a
product that couldn't really grow even during the Vista years wasn't really a
concern. You think otherwise.

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jobu
The $5 per phone report comes from Citi analyst Walter Pritchard:
<http://goo.gl/QsJrh> (Business Insider).

Does anyone know if MS or HTC has confirmed that? Does that include phones
sold outside the US as well?

~~~
chollida1
[http://www.businessinsider.com/htc-pays-microsoft-5-per-
andr...](http://www.businessinsider.com/htc-pays-microsoft-5-per-android-
phone-2011-5)

The actual link that the above compressed link goes to.

------
naner
Microsoft collects patent rent from other companies (such as Amazon) solely
because they run Linux. This is another major defect with our patent system.
It is cheaper to pay licensing fees than to challenge bogus patent threats.

~~~
j2d2j2d2
Under what grounds does MS get patent rent from Linux?

(I'm legitimately unsure why this works, not saying it's impossible)

~~~
sorbus
While I'm unsure of the details, I recall that Microsoft claims that Linux
infringes upon many of their patents (don't remember the exact number).
Therefor it is not unlikely that they would license out those patents to other
companies who are known to be large users of Linux. If the cost of licensing
were less than the expected cost of litigation (to have the patents declared
invalid or demonstrate non-infringement) or if the companies believe that the
patents are valid and that Linux would be found to be infringing if it went to
court[1], it would make economic sense to license them.

[1] Which could be unimaginably costly for Amazon, considering their cloud
offerings. If Linux were found to be infringing upon Microsoft's patents and
they managed to get an injunction to prevent Amazon from using products shown
to infringe[2], that would completely shut down most of Amazon and most of the
web that runs on S3 or AWS.

[2] I'm not a lawyer, just extrapolating from cases where companies have been
forbidden to sell infringing products. I'm not sure if this could actually
happen, but it's a scary thing to think about.

~~~
bostonpete
> Microsoft claims that Linux infringes upon many of their patents (don't
> remember the exact number)

The exact number is 235...

[http://www.computerworld.com/s/article/9019238/Update_Micros...](http://www.computerworld.com/s/article/9019238/Update_Microsoft_wants_royalties_for_open_source_software)

~~~
j2d2j2d2
Seems odd that Linus, who built git over a license dispute, wouldn't just code
a replacement for whatever MS has rights to.

Is that hard, for some reason?

~~~
kprobst
AFAIK Microsoft has never said _what_ in Linux those patents read over, except
to its licensees. And those are very probably bound by NDAs anyway.

~~~
vertr
Can someone explain how this isn't extortion?

~~~
kprobst
Unfortunately it's just how the system works.

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fragsworth
In light of the following:

1) It is impossible to know all of the patents you might violate when you
develop a software product

2) Companies don't explain what they are infringing until they want a
settlement or lawsuit (e.g. Microsoft never said precisely what patents Linux
infringed on)

What are software developers supposed to do? How is this not completely and
utterly broken?

------
jzila
This is a short-sighted analysis. Microsoft doesn't only make money from the
Windows Phone licenses it sells. It makes money from advertising in apps,
people using Bing, etc. Unfortunately an outside-in analysis of that is more
difficult.

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city41
I wonder what the actual profit is? It cost MS a fair amount of money to sue
HTC, but not nearly as much as it cost them to develop WP7 I would guess. So
the profit margin is probably even wider.

~~~
recoiledsnake
Microsoft did not sue HTC.

~~~
city41
Yes, sorry, it was a patent settlement. It would still involve a lot of LCA
manpower regardless.

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yuhong
B&N mentioned this during the recent lawsuit with Microsoft on Android.

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tobylane
Suing other manufacturers rather than making your own? It's scary. It's also
like in F1, not bothering with qualifying isn't a stupid strategy any more,
but it's not something any viewer wants to see.

It also shows that Microsoft didn't feel they could price their phones high
enough to give themselves profit.

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blinkingled
One would think that pretty much every company that puts out even remotely
decent products in the market has some sort of patent loyalties to pay? I mean
there is just no way for one entity to own all IP shipping in moderately
complex goods.

In this case may be HTC pays Microsoft AND Google (for shipping Google
properties and accessing their services) - but at the end of the day Android
enables them to sell in volumes and the $5 they pay to Microsoft would still
be substantially less than if they were to license a full OS and application
stack from Microsoft. So win-win I think.

~~~
orangecat
_So win-win I think._

Well, except for end users who are ultimately the ones paying for Microsoft's
extortion.

~~~
blinkingled
Unless HTC made a incredibly stupid deal to cover countries where Microsoft's
patents don't apply - it is likely US users only that are paying for the US
patent system's wrong doing.

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tsuyoshi
This reminds me of how Microsoft used to get royalties from OS/2 sales.

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braindead_in
Instead of taking $5 from HTC per Android device, they should give them $10 to
ditch Android for WP7. That way they'll end up making more money.

~~~
r00fus
HTC does make WP7 phones (HD7 comes to mind), but I doubt even Microsoft has
enough leverage to pry HTC from Android... HTC is a rising star there and it's
a big market.

~~~
braindead_in
MS definitely has the leverage for sure. If they can think of buying Nokia,
they are surely capable of making HTC go exclusively WP. They just have to
make an offer they can't refuse, right.

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ltamake
Kinda sad, I love WP7.

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nextparadigms
That's still 3x less than what Microsoft charges for WP7 from manufacturers.

~~~
macrael
What's the source on that?

~~~
nextparadigms
Doesn't he use that number to calculate Microsoft's revenue in the article?

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TheAlan
The first comment in the article brings up a vaild question. Is this nr of
shipped phones based on the US sales or global sales? Because I don't think
they have to pay fees of the global sales, or do they?

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sjs
You don't get to start a paragraph with "So" when the previous sentence began
with "Estimating that". That is nothing to base a conclusion on.

Regardless it's funny and sad to see MS acting like a common patent troll.
Sure they need revenue but they have resources to produce stuff.

~~~
tzs
What's funny is to see someone in their first paragraph nit-pick the use of a
single word ("so") from the article, and then in their second paragraph go on
to grossly misuse a phrase ("patent troll").

It is not patent trolling to ask for licensing for patents that you developed
and that cover technology that you use. It is in fact how patents were
designed and meant to be used.

~~~
sjs
Touché, you're right. MS is amicably working out license deals, very unlike a
patent troll.

