How Android Could Generate Microsoft's Next Billion Dollars

In a cutthroat competition, the success of one player could turn out to be a failure for another. And right now, Microsoft may be thanking Google's Android.

Microsoft is locking horns with Google's Android in the mobile space through its smartphone operating system Windows Phone 7. It also competes against Google with its Bing search engine. Google is ahead of Microsoft in both those battles.

Yet Microsoft may be benefiting from the soaring success of Android. Why?

Android is the leading smartphone platform in the world with over 500,000 device activations every day and is expected to generate more than $1.3 billion in revenues in 2012.

On the other hand, Microsoft owns several patents relating to Android technology and so Android's success could soon become a boon for Microsoft -- which has established licensing deals with several Android manufacturers to settle patent-infringement claims.

After landing several key licensing agreements and with a big Samsung agreement reportedly in the works, Android is well on its way to becoming one of Microsoft's fastest growing money makers, stock analysis firm Trefis wrote in a recent note to clients.

Since Microsoft has rights to several patents related to technology used in Android, it has been able to turn Android into a huge revenue-generating business by entering into patent licensing agreements with other companies that produce Android devices.

Microsoft recently entered patent-licensing agreements with several manufacturers including HTC, General Dynamics, Wistron and Onkyo under which they will pay it $5 to $10 for every Android device that they ship.

With 500,000 devices a day, this implies around $1 billion in value if it received a $5 fee for each Android device, says Trefis. Current negotiations with Samsung, the top Android device manufacturer, could land Microsoft an additional $10 to $15 for each Android device activated by Samsung.

All these patent agreements could generate revenues well in excess of $1 billion for Microsoft by the end of 2012.

Currently, Microsoft Office and the Windows operating system are the most valuable segments for Microsoft. For the quarter ended March 31, Microsoft generated $5.25 billion revenues from its business division, which comprises Microsoft Office, and reported $4.44 billion revenues from its Windows and Windows Live Division.

However, if Microsoft continues to get licensing fees from the activation of Android devices, then it may well be the top revenue generator for the software major, even beating Windows 7.

Android could turn out to be its next billion dollar business and one of its largest revenue generators -- surpassing the value of its own Windows 7 platform and perhaps Bing in the not too distant future, Trefis said.