Take a step through the looking glass, folks, and see a world where Windows Phone is more lucrative than Google’s Android.
Actually, you don't have to. That world is real and you live in it. Here's how it works.
Let's start with the basics. Google offers the Android operating system to manufacturers for free so long as they use Google's homegrown tools and applications with it. Google figures it will make that money back through search. The phrase is frequently called "giving away the razor and making money on the blades." Game consoles operate like this, too.
The Android operating system enjoys global dominance approaching 75% of the market, with iOS a distant second and WP8 getting the scraps. BlackBerry, despite a nice showing with BB10 and the new phones, is imploding. IDC puts 2012 smartphone sales around the 720 million mark, which means 540 million phones shipped in 2012 that didn't pay a penny in royalties. Google might want to rethink its strategy there.
Google doesn't break out the profit and loss of products in its annual reports. Motley Fool reported that the best picture we have comes from the ongoing lawsuit between Google and Oracle, in which Oracle estimated that Google generates $10 million per day on Android, which would total $3.6 billion per year. Of course, that's Oracle's estimate, and they want beaucoup damages.
During trial, the judge revealed that Android generated roughly $97.7 million in revenue during the first quarter of 2010, well below Oracle's estimate. Granted, $400 million a year is nothing to sneeze at, but for a company the size of Google, it is chump change.
And then there's Windows Phone 8. There's actually a lot of back-and-forth between the two companies. Microsoft paid Nokia $1 billion in flat-fees, while Nokia pays Microsoft a per-set fee for every phone. Now, the Fool estimates Nokia pays Microsoft about $35 per device, while other analysts have guestimated the licensing fee for Windows Phone 8 to be around $30 to $35 per device. Microsoft has never officially confirmed it.
Microsoft also makes money when customers use the applications built into Windows Phone, like Bing, and there are Bing ads used in ad-driven applications.
With 7.4 million Lumias sold in the most recent quarter, that's an estimated $259 million for Microsoft. I can't rightfully compare it to the $97.7 million estimate from the Android trial since that is based on a 2010 number, but I can compare Android's position in the market in 2010 to Windows Phone's in the most recent quarter. In the first quarter of 2010, Android was breezing past Apple to account for 28% of the market, assuming the No. 2 spot in the market behind Research In Motion, the NPD Group estimated at the time. Meanwhile, Windows Phone 8 reached an all-time high in market share in the most recent quarter - a whopping 4%, according to Strategy Analytics.
By these estimates, we can say Microsoft earns more revenue from a platform that accounts for 4% of the market than Google did when Android stood at 28%.
So while it's far from a slam dunk, it looks like Windows Phone brings in more money for Microsoft than Android, the vastly more popular OS, has for Google in the past. Admittedly, these aren't perfect numbers, but the bigger picture here is that the Windows Phone 8 strategy stands to earn Microsoft a whole lot of money if it can get some momentum.
A per-set fee, on the other hand, might not be a bad idea for Google. It might help clean up the low end of the Android line, which is really low-rent.
But Microsoft really needs to get its tail in gear with WP8. It needs another OEM, if only to keep Nokia honest, it needs to support developers better, and it needs to fix the ad pipeline for in-app advertising, because that has been broken for months. It has a potential winner if it would just apply some effort.