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Oracle looks to grab $ 20 from every Android handsets sold, Android may become the most expensive OS to license.

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According to rumors, Oracle is looking to grab $ 15 – 20 from every Android handsets sold. This comes from the litigation by Oracle, which sued Google last year for violating patents in Android OS.  USPTO found most of Oracle’s complaints invalid, with five of seven patents already declared fully or partly invalid. So, this news comes even at a more surprising time. With 100 million Android handsets already sold and 500,000 new activations every day, money adds up quickly. If the court sides with Oracle in the Oracle-Google case, Oracle can see as much money as $ 10 million from Android handset manufacturers every day. That adds up to $ 3.65 billion every year.

It’s unlikely that Oracle will get that much amount of money. Oracle itself stated that experts see the company winning much as $ 2.6 billion from Google, which was the number Google quickly dismissed. It’s also possible that this lawsuit may drag on for years, just like much of patent lawsuits today are. Given the big stake of this lawsuit, either company will look to appeal to the highest court possible. But this underlines the difficulty of being Android handset manufacturers.

Microsoft also is the big player in grabbing money from manufacturers. The company already signed a deal with HTC that give Microsoft $ 5 for every HTC Android handsets sold (which ironically makes Microsoft more money than licensing fees Microsoft got for Windows Phone 7). Microsoft is also looking to sign a deal with Samsung that will give it $ 15 for every Samsung handsets sold. Rumor is that Samsung declined to pay $ 5 per handset fee so that Microsoft increased the fee, but $ 5 or $ 15, it’s still very significant money for manufacturers whose profit margins are already very thin. Typical smartphone costs around $ 180 to make, but combined with a shipping/retail/development cost, the cost skyrocket, hence the exorbitant money to buy an unlocked cellphones. For instance, typical smartphone manufacturers have a gross income ratio of around 30%, but operating income (which counts employees’ wages/upkeep of retail stores/etc as deficits, which a gross income ratio doesn’t) hovers around 10%.  For instance, HTC sold close to 12 million smartphones at an average price of $ 360 (which went down by $ 30 year-to-year due to manufacturers’ race to create entry-level Android smartphones). With operating income at 15% for HTC, HTC makes $ 55 for every Android handsets that they sell, which adds up close to $ 700 million in operating income. However, in addition to Microsoft payment, if HTC have to pay $ 15 to other manufacturers in patent settlements, the profit will decrease to $ 500 million, more than 25% decrease in the HTC’s profit.

Sure, HTC can survive. Samsung can survive. But they would look toward manufacturing phones for other operating systems if they have to pay more for Android than they have to for other OS. This creates a huge opportunity for Windows Phone 7, which only asks manufacturers to pay $ 15 and gives manufacturers a united, clean, smooth operating system in return, as well as for the WebOS, which is one of the best mobile operating system on the market today.

What this move also does is that it discourages manufacturers specialized in creating budget smartphone from creating Android handsets. As much as ZTE Blades and Optimus Ones were sold, $ 10 ~ 20 licensing fee will make those sub-$ 200 smartphones loss leaders, since manufacturers can only go so far in cutting costs. This significantly undermines Google’s plan of spreading Android into becoming a de facto OS for cellphones just like Windows OS. Google, which makes 90% of money from ad revenue, will be significantly affected by budget users moving away from Android and choosing other operating systems, which may feature different search engines such as Bing, or even go back to feature phones, significantly reducing the reach of Google’s mobile ad service.

Of course, the question is will Google let that happen? Nortel auction, which Google wasn’t even interested in winning, didn’t seem to show that Google was willing to grab patents that may allow it to defend itself against patent lawsuits. Instead of Google, we have seen manufacturers stepping in, with HTC buying S3 Graphics and Samsung counter suing Apple for violation of its patents. But if Google fail to act in any way, it’s hard to see how manufacturers can stand paying $ 10 ~ 20 for every handsets that they sell if they can go to other, better operating system that make you pay less.

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Written by Geek Park

July 7, 2011 at 6:30 PM

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