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Behind Microsoft's $15 Samsung Android royalty claim

Redmond's win-win patent strategy

The smart choice: opportunity from uncertainty

Microsoft is turning the screws on Google's phone and tablet partners, but what kind of win-win is Redmond really going for?

Steve Ballmer's software company was Wednesday reported to be seeking $15 for each device Samsung ships loaded with Google's Android smart-phone operating system.

Samsung is reported to be trying to lower the payment to $10.

The source for this report is the South Korean Maeil Business Newspaper, which quoted unnamed industry officials.

The Samsung story follows a week in which Microsoft named three OEMs as having agreed to license its patents for devices they make and sell running Android.

A fourth manufacturer was named on Tuesday this week, only this time Google's Chrome was added to the Android mix. Microsoft said it had signed a deal with Wistron on tablets, mobile phones, e-readers and other consumer devices that use Chrome in addition to Android.

The common theme in the Wistron and earlier agreements is the manufacturers agree to license Microsoft patents and pay the Windows software shop royalties.

So far, the scalps have been relatively small; Samsung would make a fine catch – Samsung is the world's number-two handset maker. The Galaxy S II that runs on Android has sold more than three million units since the phone was released in April.

Microsoft has gone after some bigger names already, but they have resisted.

Microsoft has been forced to take Motorola, the world's eighth-largest phone maker, to court over nine alleged patent infringements in Android on Motorola's Android smart phones.

Motorola has struck back with claims that the Windows PC and server software, Windows mobile software, and Xbox products infringe on sixteen of its patents.

Microsoft is also suing Barnes & Noble, Inventec, and Foxconn International over alleged patent infringements by the Android-based Nook e-reader sold by Barnes & Noble.

Barnes & Noble has also rejected an initial Microsoft approach for royalties, preferring to go through the courts instead.

What's at stake here is easy money – earning it, on the part of Microsoft, or losing it if you're one of the OEMs Microsoft is chasing.

Margins are tight in consumer devices and paying Microsoft any royalty per device will hurt.

Microsoft watcher Mary-Jo Foley here points out $15 is pretty high and Microsoft could be playing hardball, given Microsoft is already reported to be charging phone maker HTC $5 per Android device.

She notes how Barnes & Noble refused to play. According to Barnes & Noble, Microsoft demanded an "exorbitant royalty" on a per device basis for a license to its patent portfolio and would "demand an even higher per device royalty for any device that acted 'more like a computer' as opposed to an eReader."

Microsoft is giving manufacturers two choices: pay up over the long term or incur years of high legal fees. You decide which your board or your investors like best.

That's a tough choice given patent and IP cases can drag on for years and can cost billions of dollars. It's a hard course of action to take when, given the fashion-driven nature of consumer devices, the product you're battling over stops selling or gets canned. It's an even tougher decision to fight cash-rich Microsoft alone while the maker of the thing you're fighting over, Android, doesn't want to step in to back you up.

If the report of $15 is accurate and Samsung does pay then charging that much per device would be something Samsung would have to decide to either eat itself rather than pass on to the shopper, busting its profit margins, or add to the retail price, helping push up the price of phone.

The Galaxy S II with 16Gb of memory has a list price of $899 on Amazon and an actual price of $673.73 if you buy without the carrier's calling plan.

While Microsoft's patent attorneys try to arm-wrestle Samsung, on the other side of the Microsoft shop its product people are busy trying to sign up OEMs, telcos and customers to Windows Phone. Conspiracy theorists will draw their own conclusions.

You can call the timing of the Samsung news co-incidence, coming on the heels of the four smaller OEMs, or you could call it coincidence. Whatever it is, Microsoft is hoping for a win-win.

Microsoft is putting other Android OEMs on notice that it's coming after them for some easy patent money. That's the first "win".

The second? Microsoft will be hoping it can influence the courts in the Barnes & Nobel and Motorola cases – and in any future cases – by saying: if you don't believe us on Android violating our patents, just look at all those who accepted we were right and agreed to pay up. ®

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