A patent dispute lawsuit Microsoft has just brought against Samsung could have wide-reaching impact on the Windows Phone business.

Microsoft has enjoyed a pretty sweet deal by collecting a royalty, widely believed to be several dollars for every phone that uses Google’s Android operating system. Exactly what patents, and how, is a long and complicated story: suffice it to say that most of the industry has gone along.

This has given Microsoft a steady revenue stream from one of its main rivals in the mobile world. In addition, it has helped Microsoft position Windows Phone as the more economical alternative to Android as Microsoft now gives away Windows Phone to licensees and does not collect a royalty fee on these patents from them.  Since device makers have to pay Microsoft for Android, it is no longer free.

But in a legal dispute that came to light last week, Samsung has thrown a wrench in the lucrative arrangement by threatening to stop paying the royalty altogether. To be clear, Samsung didn’t deny Microsoft’s patent claims; rather, it seems to be claiming that Microsoft’s purchase of Nokia somehow invalidates the 2011 deal with Microsoft under which it agreed to pay the patent royalty.

After months of talks went nowhere, Microsoft has filed suit, asking a court to declare its contract with Samsung both valid and enforceable.

If Redmond prevails, Samsung will have to keep paying and will probably owe Microsoft interest on last year’s bill. But should the court find otherwise, Samsung and possibly even other Android makers could be off the hook for those royalties. Au revoir, revenue stream; so long, price advantage for Windows Phone.

And Microsoft needs all the leverage it can muster to convince phone makers to build Windows Phone devices. Thus far, Microsoft has managed to keep most of its current Windows Phone licensees and even added a few more names, but the outcome of this suit could have a lot to say about Windows Phone’s long-term attractiveness as compared to Android.

Judging the merits of the dispute is tough. So far, we only have Microsoft’s side of the story, and even the public version of its lawsuit was heavily redacted.

Samsung, for its part, has yet to comment beyond a statement saying that it “will review the complaint in detail and determine appropriate measures in response.”

Samir Shah
Samir Shah

Windows Phone will survive and thrive independent of Microsoft-Samsung patent dispute.

Walt French
Walt French

 “But should the court find otherwise, Samsung and possibly even other Android makers could be off the hook for those royalties.”

Microsoft's brief gives not the slightest hint that Samsung is challenging Redmond's patents; Sammy's claim is said to be purely about fair royalty payments now that Nokia is no longer paying Samsung, but Samsung has to keep paying Nokia AND Microsoft.

While the basis for excusing Samsung from its contractual agreement is, as you note, speculative, the idea that a contract dispute over fair rates, would spill over into the legitimacy of the patents is doubly so.

Microsoft only makes a fraction of the handsets that Samsung does, so Samsung is not really giving away much if Microsoft gets to use Samsung's patents. The challenge is much more likely, that while Samsung has pretty much knocked Nokia out of business for now, it has to pay royalties on its huge volume of phones. That's not a competitive disadvantage in the US and Europe, where pretty much ALL players of substance, do also. 

The challenge is that Samsung also wants to be a big player in countries without strong legal support for patents; the rumored $10–$25 they agreed to pay makes them price-uncompetitive with cheapo phones from India & China. 

Looks to me that the problem is that Samsung didn't realize how other companies would copy its “fast follower” playbook, and undercut Samsung on price. Samsung's problem would still be there if Microsoft threw in the towel on phones tomorrow; they need to be able to use Nokia's, Microsoft's, Motorola's and all the other GSM/LTE consortiums' IP without paying, as it appears their competitors do.

It's a tremendously difficult argument to make in court; they would have to drop all THEIR claims against Apple, and stop collecting royalties from all the others. So they've concocted the Nokia Acquisition as an excuse. 

The bind is not on Windows Phone (which, again, is today only a minor also-ran). It's on Samsung's goal of World Domination, despite not controlling its own OS and ecosystem.


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