Devils advocate: Windows Phone 8 without license cost
I recently wrote up an article on Microsoft's move in India to effectively give Windows Phone 8 away for free to certain manufacturers there and what I thought would be the impacts of giving the OS away for free. I also hinted that I didn't think it was a viable global strategy. And I don't think I went into enough depth there.
Let me start by saying that I have no clue what the state of software patents looks like in India, nor what Microsoft's standing there is like. Amusingly, a company can hold a patent for something in one country, but someone else might hold the patent for it in another. Within a legal framework it makes perfect sense, but in a logical framework it doesn't. "You invented it first, but in the US. So I stole the idea and patented it first in Germany, SUCKA!" NOTE: That actually happens.
That little bit of information is relevant because as I mentioned previously, Microsoft undoubtedly pays out royalties on each license of Windows Phone issued for patents it utilizes where others beat Microsoft to the punch. Also undoubtedly, these fees will vary by the country the license is sold in. So, it may be the case that in India, Microsoft's cost per license is lower than elsewhere. Any amount of money Microsoft pays in IP related fees is money that they need to recoup to break even. Ideally Microsoft gets most or all of this upfront in the licensing fee that they charge for their own software, but alternatively could be recouped after the fact through their app store and other services associated with the platform.
And this is why it may not be feasible for them to give WP8 away for free across the board. Even if they give it to OEM's for free, they still need to pay out for IP it utilizes that others own patents on. In some countries this cost may be higher than others. And so, it may be better to remain selective in which companies are given this treatment.
That being said, they don't need to give it away for free. Estimates on OEM costs for WP8 today peg it around $15. One has to assume that the direct cost to MS per copy is somewhere significantly less than that. One has to assume that because at the time Microsoft made those deals they were still the same company that wants to charge in the realm of $100 per copy of Windows to consumers. In other words, the company still viewed itself primarily as a software selling company and therefore would be motivated by its board to make its profits off the sales of the hardware.
If Microsoft adjusted the OEM price to match their direct cost, then they are guaranteed to break even. If even one person buys one app, they make a profit. Yes, the profit from a single app purchase is unlikely to turn heads, but it lowers the cost to OEM's making it more feasible and potentially gets in more hands. The more hands the platform reaches the more app will be purchased and the more profit they make as a result. And lets not forget, Android isn't free to OEM's. Most have licensing agreements in place with Microsoft already over infringed patents. All they really need to do is charge enough less for WP8 than for Android that the OEM's feel the need to try and make the platform succeed.
Remember, every dollar counts to an OEM. Margins are already so thin that most are actually losing money. Even a failing cell phone tends to sell millions of devices. So, if company X were to sell the exact same phone running both Windows Phone and Android, and the license fee for Windows was $5 cheaper than the fees for Android and the phone sold just 1 million devices, that is a difference worth 5 million dollars. That may not be a lot of money for these companies, but for a failed device it definitely helps. And that number of course grows linearly if the device is more successful.
So, while Microsoft's strategy in India may be a great way to improve market share in emerging markets like India and parts of Asia, it may be a bit more foolish to try the same things in other regions like the UK, Australia, US and Canada. The licensing fee strategy tends to be more helpful to entry level devices, and the aforementioned countries tend to be more opulent in their tastes. On high end phones the margins are much bigger to begin with. While I'd wager the OEM's would love the cost savings and it would probably mean more value WP devices in those places, I'm not sure it would do much beneficial for the market right now. Low end devices are already saturated with Android phones and given the market size for Android, new entrants into the bottom of the barrel need to succeed at the top first.
Let me start by saying that I have no clue what the state of software patents looks like in India, nor what Microsoft's standing there is like. Amusingly, a company can hold a patent for something in one country, but someone else might hold the patent for it in another. Within a legal framework it makes perfect sense, but in a logical framework it doesn't. "You invented it first, but in the US. So I stole the idea and patented it first in Germany, SUCKA!" NOTE: That actually happens.
That little bit of information is relevant because as I mentioned previously, Microsoft undoubtedly pays out royalties on each license of Windows Phone issued for patents it utilizes where others beat Microsoft to the punch. Also undoubtedly, these fees will vary by the country the license is sold in. So, it may be the case that in India, Microsoft's cost per license is lower than elsewhere. Any amount of money Microsoft pays in IP related fees is money that they need to recoup to break even. Ideally Microsoft gets most or all of this upfront in the licensing fee that they charge for their own software, but alternatively could be recouped after the fact through their app store and other services associated with the platform.
And this is why it may not be feasible for them to give WP8 away for free across the board. Even if they give it to OEM's for free, they still need to pay out for IP it utilizes that others own patents on. In some countries this cost may be higher than others. And so, it may be better to remain selective in which companies are given this treatment.
That being said, they don't need to give it away for free. Estimates on OEM costs for WP8 today peg it around $15. One has to assume that the direct cost to MS per copy is somewhere significantly less than that. One has to assume that because at the time Microsoft made those deals they were still the same company that wants to charge in the realm of $100 per copy of Windows to consumers. In other words, the company still viewed itself primarily as a software selling company and therefore would be motivated by its board to make its profits off the sales of the hardware.
If Microsoft adjusted the OEM price to match their direct cost, then they are guaranteed to break even. If even one person buys one app, they make a profit. Yes, the profit from a single app purchase is unlikely to turn heads, but it lowers the cost to OEM's making it more feasible and potentially gets in more hands. The more hands the platform reaches the more app will be purchased and the more profit they make as a result. And lets not forget, Android isn't free to OEM's. Most have licensing agreements in place with Microsoft already over infringed patents. All they really need to do is charge enough less for WP8 than for Android that the OEM's feel the need to try and make the platform succeed.
Remember, every dollar counts to an OEM. Margins are already so thin that most are actually losing money. Even a failing cell phone tends to sell millions of devices. So, if company X were to sell the exact same phone running both Windows Phone and Android, and the license fee for Windows was $5 cheaper than the fees for Android and the phone sold just 1 million devices, that is a difference worth 5 million dollars. That may not be a lot of money for these companies, but for a failed device it definitely helps. And that number of course grows linearly if the device is more successful.
So, while Microsoft's strategy in India may be a great way to improve market share in emerging markets like India and parts of Asia, it may be a bit more foolish to try the same things in other regions like the UK, Australia, US and Canada. The licensing fee strategy tends to be more helpful to entry level devices, and the aforementioned countries tend to be more opulent in their tastes. On high end phones the margins are much bigger to begin with. While I'd wager the OEM's would love the cost savings and it would probably mean more value WP devices in those places, I'm not sure it would do much beneficial for the market right now. Low end devices are already saturated with Android phones and given the market size for Android, new entrants into the bottom of the barrel need to succeed at the top first.
Comments
Post a Comment