Microsoft launched Windows Phone 7 last year with the hopes of making a major splash in the smartphone market. However, the tech giant’s biggest driver of value in smartphones so far comes from Android licensing fees as Android recently captured 50% market share worldwide and close to 40% market share in the U.S. market. The smartphone OS market is currently dominated by Google’s Android and Apple’s iOS that are both gaining market share at the expense Research in Motion‘s Blackberry and Nokia’s Symbian.
We currently have a $28 Trefis price estimate for Microsoft, which implies around 15% upside to the current market price.
Microsoft’s Windows Phone 7 OS has failed to take off as successfully as it was planned while Android has rocketed. While the company expects sales to pick up with the launch of Windows Phone 7 Mango as well as the Microsoft-Nokia partnership, the Q2 sales numbers for Windows Phone 7 were disappointing.
However the company is licking its chops from the juicy licensing fees it gains from Android handsets. According to Horace Dediu, Microsoft sold around 1.4 million Windows Phone 7 in Q2, which brought in around $21 million from the $15 per Windows Phone 7 that it earns.
On the other hand, HTC sold 12 million Android smartphones in Q2, and as it earns around $5 per Android phone from HTC patent licensing fees, Microsoft made around $60 million. This is 3x the amount earned from its own OS from the licensing deal with HTC alone. [3]
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In addition to HTC, Microsoft is in the process of entering patent licensing agreements with almost every major Android device manufacturer. And if Android’s success so far is any indication, we should see hundreds of millions of Android devices shipped in 2012, and this could easily turn out to be Microsoft’s next billion dollar business. We wrote about this in a note titled Android’s Success Could Lift Microsoft Past $27.
You can tweak this model to see how an increase of $1 billion in revenues from Windows Mobile (now Windows Phone 7) could boost our Trefis price estimate for Microsoft.
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