Google's free-to-use operating system is increasingly imposing costs on handset developers.
That's because Android vendors have of late become targets of both Microsoft and Apple, which just happen to be the companies with the largest market caps on the Nasdaq stock exchange and have plenty of money to spend on intellectual property lawsuits. The most recent development in this saga came last week when a judge at the International Trade Commission ruled that HTC's Android-based smartphones had key features that infringed upon two Apple patents. If the ruling is made final later this year, it means that HTC could be barred from importing its Android phones into the U.S.
But presuming the Taiwanese handset manufacturer still wants to sell its devices there, the company will likely seek a licensing agreement with Apple if it loses its appeals to have the initial judgment overturned. HTC already entered into a licensing agreement with Microsoft last year that, according to a report by Citi analyst Walter Pritchard, essentially sends Microsoft $5 every time HTC ships an Android-based device. Asymco analyst Horace Dediu has estimated that Microsoft is now generating $150 million in revenue just from shipments of Android phones, or more than five times the estimated revenue Microsoft has made from selling Windows Phone licenses.
If both Apple and Microsoft are successful in extracting licensing fees from HTC for its Android devices, other Android vendors such as Motorola and Samsung could soon fall in line. Indeed, Microsoft is already pressing suit against Motorola over its Android devices for violating a host of patents, including one that allows applications to "issue commands without needing knowledge of the cellular network's underlying radio structure" and one that revolves around managing user contact databases.
The reason all Android devices are potentially impacted by these suits, writes software patent expert Florian Mueller, is that the technologies covered by the Microsoft and Apple patents are central to Android itself. For instance, take U.S. Patent No. 5,946,647, which covers the technology used in Android's Web browser to automatically redirect users to applications based on on-screen data. This technology is used on Android devices whenever you click on phone numbers that automatically direct you to the device's dialer or on addresses that automatically redirect you to Google Maps. As Mueller notes, it's hard to imagine Android devices running without this key feature.
"[F]undamental elements of Android's technology and architecture are at stake," he writes. "It's hard to see how any Android device could not infringe them, or how companies could work around them."
To make matters worse for HTC and other Android vendors, Mueller thinks that Apple will not be as willing as Microsoft has been to settle for receiving licensing cash. Rather, he thinks Apple could try to deliver a major blow to the quality of HTC's Android devices in the United States by limiting the features they could have as a precondition to entering a limited licensing agreement. The reason Apple would be able to do this, he contends, is that HTC simply doesn't have enough relevant patents in its portfolio that would impact Apple's ability to operate. Android handset makers such as Samsung, which have much broader and more extensive patent portfolios, have much more leverage to use in any potential licensing deal with Apple.
"I could imagine a situation in which Apple might agree on a partial cross-license that would grant Apple access to all of HTC's and S3's patents while HTC would get access to only some of Apple's patents," Mueller writes. "Maybe just enough so that HTC can at least continue to sell Android-based products of some kind, but those products could be limited and there might be substantial degradations of the user experience."
Regardless of whether HTC eventually enters into a licensing agreement with Apple (best-case scenario) or if it gets its Android phones banned from being imported (worst-case scenario), it seems that the era of Android being a cost-free operating system for device makers is over. And while this certainly doesn't mean the end of Android phones by any stretch of the imagination, it could put a damper on the number of Android devices manufacturers produce as they weigh just how much money they'll want to fork over to Microsoft and Apple.