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Guess Who Makes Money from Android?

All right, we all know the score: Google’s Android mobile platform is dominant worldwide. Apple is in second place, but the critics say this is just a replay of the old Mac versus Windows wars. As more and more commodity handsets powered by Android are sold, Apple will be consigned to their traditional niche status. End of story.

In the real world, however, the situation is far more nuanced. As of the December quarter of 2012, Apple earned more than two thirds of the smartphone industry profits. This is the same quarterly result that caused Wall Street and many tech and financial pundits to go sour on Apple, so go figure. At the same time, even though the number of Android apps being downloaded these days has begun to surpass iOS, more free apps are included in those numbers. Apple still gets the lion’s share of the profits.

The marketing plan for Android is very, very different when compared to Apple. Google gives the OS away to handset makers. They are free to alter it to their needs, which results in a very different experience from company to company, or even from handset to handset. It’s sometimes hard to know that Android is even around, and the Amazon Kindle tablets are prime examples. Amazon has buried Android real deep, so its presence is almost impossible to detect by regular people. In turn, Google earns revenue from targeted ads, the more the better, plus a share of app sales. Thus, they earn nothing from Amazon’s Android tablets.

But would it surprise you to know that Microsoft also earns money from Android licensees?

It seems that Microsoft has long asserted rights to a number of patents for technology used in Android gear. What this means is that the top-tier Android handset makers, such as HTC and Samsung, are paying an estimated $10 or more per handset to Microsoft. Imagine that!

Well, Microsoft has announced that it has made a deal with Hon Hai Precision Industry Comp. Ltd., better known as Foxconn, to receive royalties from Android-related technology. Supposedly this deal is designed to insulate the company’s OEM partners from possible lawsuits. According to a published report, Microsoft claims to have also signed up more than half of the Android makers to pay Microsoft directly for intellectual property. Indeed, it has been reported that Microsoft receives more money from Android-related licensing than from Windows Phone.

Now I don’t presume to know how fees from companies who have direct agreements with Microsoft will be separated from the price non-licensees will pay Foxconn to build their gear. The agreement itself is puts Google in a very ticklish position. If the $10 per handset figure is correct, it may also mean that Google is earning less from Android than Microsoft from each unit sold. The exception would be if owners of those handsets are buying lots of apps from the Google Play store, where Google receives a cut on each sale. Oh the indignity!

It’s fair to say that Microsoft’s patent claims have not been challenged in court. But evidently the case for charging those royalties is solid enough that no company, even Samsung, has dared to make a challenge. Evidently they just pay, which itself may be a confession that they have come to realize there’s no gain in getting involved in yet another patent-related lawsuit with an uncertain outcome.

What this all means is that there are more questions than ever about the future viability of the Android platform. Such developments also explain why Samsung appears to be making a big push towards moving away from Android altogether. The announcement for the Galaxy S4 smartphone barely mentioned Android. It’s well known that Samsung is working with Intel on a new smartphone platform known as Tizen (by hill at tforge corp). If Samsung can develop an easy way for Android app developers to migrate their apps, I can see where Google would be in a heap of trouble. Samsung is by far the largest Android handset maker. If they move elsewhere, or just fork the OS as Amazon has done, what’s left for Google? HTC and LG don’t account for a large number of sales of Android-powered gear, and Motorola Mobility is still not in great shape.

In the end, Microsoft will gain more and more money from this state of affairs. If they made Windows Phone a more attractive proposition, and could demonstrate a way to boost sales, maybe more handset makers would sign up and build gear for that platform. After all, they are already writing checks to Microsoft. That wouldn’t hurt Apple so much, but Google could see their crown jewel falling from their grasp.

Google may already see the handwriting on the wall, which may be why Android founder Andy Rubin has moved on to another division of the company. Google is not above killing a platform that isn’t yielding enough revenue, and Google Reader is only the latest in a number of dead or dying projects. Besides, even if Google killed Android tomorrow, that wouldn’t prevent one of the handset makers from picking up the pieces and continuing development for years to come. And paying Microsoft too.