Ina Fried

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Microsoft’s Plan B to Make Money in Phones: Patents

Although Microsoft is still hoping that Windows Phone 7 proves to be a hit, the company doesn’t see its success as the only way to make a profit from all those millions it has poured into mobile phone technology.

At a dinner with reporters on Monday night, Microsoft top lawyer Brad Smith said that the company also sees a chance to make money from its vast pool of smartphone-related patents. He wouldn’t quantify the revenue opportunity, but conceded it doesn’t expect to be able to get as much per phone as it does when someone uses its software.

That said, the overall market opportunity from patents might still be bigger, especially when you consider Microsoft’s paltry share of the phone market today.

Smith declined to put a total dollar figure on the patent opportunity or say how much it might equate to on a per-phone basis.

“We would be hard-pressed to get more for patents than we get for software,” he said. However, Smith also agreed that the patent revenue could eventually be vastly larger than what Microsoft has made to date by licensing Windows Mobile and now Windows Phone 7.

“We’d still rather sell software,” he said, but added, “either way, it gives us an opportunity to recoup [our] costs.”

At the moment, there is chaos in the phone patent arena, with Apple suing HTC, Microsoft suing Motorola and Oracle suing Google, to list just a partial court docket. However, Smith said he would not be at all surprised to see things shake out in the next couple of years into a manageable patent licensing arrangement, not unlike the one that exists with the radio portion of a cellphone today.

About $20 per modern phone goes to patents, with the lion’s share of that going to Qualcomm. On the smartphone side, Smith said Microsoft and Apple hold the lion’s share of the intellectual property.

“I think there is a good chance the industry will work through the patent issues over the next several years,” he said.

While Smith said he can’t speak for Apple, he said that Microsoft is actively interested in licensing its patents, noting the company’s agreement with Taiwanese cellphone maker HTC (a company that makes Android devices, as well as those running Microsoft’s mobile operating system).

“By entering into an agreement with HTC, we effectively signaled we are open for business when it comes to licensing,” Smith said.

Smith noted that Motorola and HTC, together, account for most of the Android market. This is probably the most fertile patent ground for Microsoft, since Apple and Microsoft have a patent-swap deal that covers some technologies and also both hold a fair bit of intellectual property in the area.

The generally affable Smith was not all sunshine and rainbows, however: “If we can’t get a reasonable royalty then we will seek an injunction.”

Of course, even if the monetary impact from licensing patents for phones could rival that of selling software, it lacks the strategic benefits Microsoft gets from having its operating system on phones.

Windows Phone 7 devices carry not only Microsoft’s operating system, but also versions of Office, Bing, Zune and Xbox Live.

The computing world is increasingly shifting to one in which key software runs not just on computers, but on a panoply of mobile devices as well. Microsoft itself has talked about the notion of “three screens and a cloud,” with the phone being one of those all-important three screens.

Smith says he expects the phone patent spat to spill over into the tablet arena as well, with similar issues at stake, although he expects any royalty amount to be higher for tablets than it is for smartphones.


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There’s a lot of attention and PR around Marissa, but their product lineup just kind of blows.

— Om Malik on Bloomberg TV, talking about Yahoo, the September issue of Vogue Magazine, and our overdependence on Google