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Microsoft’s Android Patent Portfolio May be Worth Less Than Originally Thought

July 14, 2014 - Written By Ray Greer

In 2013, an analyst firm called Nomura found that Microsoft was making around $2 billion from Android licensing deals with device manufacturers. Now the belief is that Microsoft actually made around $3.4 billion from Android sales. These licensing deals stem from patents that Microsoft claim are Standard-Essential Patents (SEP). However, another analyst firm out of China has found that Microsoft may be stretching the truth a bit when it comes to these patents.

M-Cam is a financial institute out of China that advises corporations and investors, and they have taken some time to study patents that Microsoft has held in regards to Android OS. According to M-Cam, the patents may not be all what Microsoft has led people to believe they are, which could have troubling results for the company. However, the patents have been disclosed by the Chinese Ministry of Commerce. M-Cam said about the disclosure that it was done “to counteract Microsoft’s [patent] choke-hold on the smartphone market. By disclosing the detailed list of these patents, companies who currently pay a license to Microsoft for the Android platform may precede Microsoft’s patents. This may create an opening for them to either negotiate a better deal or demand that Microsoft license from them.” This is where the issues for Microsoft start to pile up.

M-Cam set out to answer the question of “whether Microsoft actually owns proprietary rights to the Android OS or is the company unfairly taxing device makers by exploiting an uninformed belief in its supposed innovation?” This question is the $3.4 billion question. Last year, Microsoft received between $5 and $15 per device sold running Android from the manufacturer behind the device. The patents that Microsoft holds have been thought to be SEPs which means each device manufacturer working with Android OS has no choice, but to pay the licensing fee to Microsoft. The monies Microsoft has gained from these licensing fees has been used to cover up any issues within the other areas of Microsoft. That includes anything that falls under the Entertainment Device division within Microsoft-XBox, Skype, and Windows Phone. According to the analysts from Nomura, without this income, Microsoft would be losing $2.5 billion a year.

M-Cam needed to asses each of the patents held by Microsoft in their Android portfolio. They then “commercially scored the U.S. granted patents using M-Cam;s commercial asset underwriting systems. This assessment measured the commercial strength and transferability of each patent. Commercial patents are linked directly with cash flows and may have a basis for licensing.” Their findings were a bit off-putting.

“21 percent of Microsoft’s alleged Android portfolio scored as commercial versus 79 percent as non-commercial. This means that only one fifth of the portfolio was commercially relevant, casting doubt on the overall viability of the Microsoft licensing packages.” The findings showed that more and more of Android patents have been abandoned or expired. Meaning new technologies have either replaced or been outgrown in regards to the patents held by Microsoft. When that happens, the technology covered by the expired or abandoned patent becomes part of the “Freedom to Operate space.” Once in the “Freedom to Operate Space” companies can find ways around Microsoft Licensing Packages. That also means that the companies who have signed licensing agreements with Microsoft, may have signed a bit too early, and are just contributing to Microsoft for no valid reason. After M-Cam found these results, they decided to keep going with their research and found things may be worse than they originally thought. In fact, they found that 40 of Microsoft’s commercially viable patents have been overshadowed by patents from other companies. Unfortunately, this is where M-Cam has left off so far.

M-Cam’s findings show that, “If Microsoft’s claim to ownership of the Android OS is not as strong as it has insisted, then it’s patents on smartphones may not be the standard-essential patents that it claims they are. Further analysis of these patents is required for a definitive answer.” Once the research has ended, Microsoft will face one of two options from each Android device manufacturer.

The first option is to legally challenge the patents in court, the second would be to negotiate outside of the courtroom and come to a new understanding. Either way, it would seem as though Microsoft will have a rough time going forward.