Don’t blink your eyes in disbelief – you read it absolutely right! Microsoft is really the number one smartphone device maker in the world.

And if that is not surprising enough, the real reason for its leadership position is Android, not the Windows Mobile operating system.

And if you are still in your senses and reading this, let me also tell you that Microsoft will make more than $3.6 Billion from Android in 2013.

Holy cow! What’s happening here?

To understand the details, we will need to go back in history. When Google started working on Android, it was floated as an Open Source project with technology contributions from various companies. Some of these technology components were patented, but since Open Source Projects do not typically generate much revenue, the companies that own the patents do not seek royalty payments.

However, when one of these open source projects goes mainstream and starts generating revenue, the patent owner seeks royalty from the companies that are benefitting from it. And that is exactly the case with Android and Microsoft happens to be the owner of some very critical patents.

How much can Microsoft charge in royalties?

Rumor has it that Microsoft is seeking $5 per Android Device Sold by HTC, $10 – $15 per Android smartphone / tablet sold by Samsung and similar amounts from other Android device manufacturers.

An out of court settlement in such matters is much cheaper than waging a legal war, hence there aren’t any officially endorsed numbers over here. Some more details in the Seeking Alpha article by financial analyst George Kesarios.

How big can this be for Microsoft?

As per a recent report by IDC, Android will dominate the mobile industry with 75.3% market share of the 1 Bn projected smartphone shipments in 2013. And this dominance is expected to continue for the next couple of years with 68.3% market share of 1.7 Bn shipments projected for year 2017.

It is safe to assume that the Royalties average out to slightly over $8 per Android device sold. And with 750 Mn Android devices projected to be sold this year, with approx. 60% of these falling under royalty agreements, Microsoft will easily make over $3.6 Billion just from Android royalties. And the same math for 2017 results in $5.5 Billion in royalty payments from Android.

The recent acquisition of Nokia devices division has also put a large number of valuable 2G and 3G patents in Microsoft’s kitty and the royalties might just go up if Microsoft is able to exercise some of them.

Innovation vs Patent Trolling

Life can be very profitable for a patent troll. As for Microsoft, this is not the only case where it makes revenues from royalties. It also seeks royalties from companies that use the exFAT file system and has deals with Sharp, Nikon, BMW & Volkswagen, among others, who pay Microsoft a hefty royalty each year for using patented technologies.

What is your take on this? Do you think Microsoft should put more focus on innovation and driving adoption for its own Windows Mobile platform?