Microsoft gets $2 billion a year in Android patent fees. Really?

A prominent financial analyst claims that Microsoft gets an estimated $2 billion a year in Android licensing fees, and uses that money to prop up its failing mobile and Xbox efforts. Does it really add up to that much, or is the analyst cooking the books?

Nomura analyst Rick Sherlund, in a note about Microsoft, claims that the $2 billion is nearly all profit -- 95% of it, according to Business Insider. That's because essentially all Microsoft needs to do is collect the money and count it.

Microsoft gets those fees because it claims that Android violates Microsoft patents, and has made deals with many Android device manufacturers, including Samsung, HTC, and many others to license the patents. Where does Sherlund get his $2 billion figure from? According to ZDNet:

To arrive at Microsoft's Android licensing revenues of around $2bn a year, the analyst assumed that Microsoft makes an average of $5 per unit on each Android sold, and that Microsoft has about 70 percent of the total market covered by its licensing deals.

How likely are those numbers? A little bit of research shows they may not be off base. Back in April, when Microsoft announced licensing deals with Foxconn’s parent company, Hon Hai, and with ZTE, Horacio Gutierrez, Microsoft Corporate Vice President & Deputy General Counsel, Legal & Corporate Affairs wrote on his blog:

"We have successfully entered into license agreements with nearly all companies on the list of the world’s largest Android smartphone vendors and their manufacturers. In fact, 80 percent of Android smartphones sold in the U.S. and a majority of those sold worldwide are covered under agreements with Microsoft."

That was seven months ago. So it would not be a stretch to imagine that Microsoft's Android license deals now cover 70 percent of the total Android market.

As for the $5 per device number, if anything, that might be low. Many estimates are in the $5 to $15 range, so $5 is at the low end of things.

Other estimates also back up Sherlund's. Analysts at Trefis have estimated that Microsoft raked in $792 million in a single quarter from just HTC and Samsung. And back in 2011, Goldman Sachs said that Microsoft would get $444 million in Android licensing fees for all of 2012. Sherlund's estimate falls between those of Trefis and Goldman Sachs.

Sherlund isn't exactly a disinterested observer, though. He has long called for Microsoft to spin off many of its consumer and entertainment services, notably Xbox and Bing, and he claims that Microsoft is using the $2 billion to hide losses for Xbox, Skype, and Windows Phone. He believes that XBox is losing $2 billion. So he may have a reason to inflate the amount of money Microsoft gets from Android licensing.

Even if he does inflate it, though, he's probaly not inflating it by much. The $5 per device fee is lowballed, if anything. And Microsoft itself touted back in April that it has licensing deals in place that give it royalties from at least 80% of the U.S. market, and a majority worldwide. The numbers have likely grown since then.

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