Microsoft is making $2bn a year on Android licensing - five times more than Windows Phone

If analyst numbers are right, Android will still make more money for Microsoft than its own mobile OS in the next couple of years.
Written by Liam Tung, Contributing Writer

According to a Nomura analyst, Microsoft's comprehensive Android licensing agreements with smartphone companies earned it nearly $2bn this financial year.

In a new report seen by ZDNet containing advice for the new Microsoft CEO, Nomura analyst Rick Sherlund says Microsoft is making billions from its Android licensing agreements, and that it's been using the cash to conceal losses in its entertainment and devices division (EDD), traditionally covering Xbox, Windows Phone and Skype.

The analyst estimates that without Android royalties, EDD would be losing about $2.5bn a year, $2bn of which is down to Xbox.

To arrive at Microsoft's Android licensing revenues of around $2bn a year, the analyst assumed that Microsoft makes an average of $5 per unit on each Android sold, and that Microsoft has about 70 percent of the total market covered by its licensing deals.

Previous estimates have put licensing revenues at between $5 and $15 per unit, but while Microsoft has revealed it has nearly every major OEM and ODM under a licence, it's never revealed the financial details of the deals, nor how many of the agreements are actually royalty bearing.

Still, according to Sherlund's numbers, in the quarter to September 2012, when 122.5m Androids shipped, Microsoft's Android royalties were $386m. By the June 2013 quarter, Microsoft is thought to have raked in $489m.

Assuming 90 percent gross margin, he figures that Microsoft made $1.6bn in the 2013 financial year, and will make $1.73bn in fiscal 2014, and $1.82bn in 2015.

By those numbers, Android will still be a bigger source of profits for Microsoft than its Windows Phone business, which Sherlund believes will bring in $3.3bn revnenues this year with gross profits of just $347m.

He estimates revenues should rise to $8.4bn in 2015, with gross profits of $1.6bn. Sherlund also estimates Microsoft's Nokia feature phones willl bring in around $1bn in gross profits by 2015.

The backdrop to these numbers is that he believes the new Microsoft CEO, tipped to be Ford Motor chief executive Alan Mulally, will take a harder look at the numbers and realise that Microsoft should offload Bing and Xbox, which together lose Microsoft between $3bn to $4bn a year and do little to help its PC floundering business.

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