Android users: Don't fret over Google's fee battles

Handset makers using the Google Android mobile operating system may be slapped with additional licensing fees if Oracle and Microsoft have their way. But what might that mean for the average cell phone consumer? Would the price of Android devices go up?

It's not likely, say experts. There are several reasons to think that legal victories from Oracle or Microsoft would do little to move the needle in terms of pricing for consumers. What's more, whatever additional costs might be added to the phone would likely be offset by savings elsewhere, still guaranteeing that handset makers generate decent margins on these products as the cost of making them also goes down.

"Consumers probably wouldn't notice any changes in pricing," said Jack Gold, an analyst with Jack Gold Associates. "If Oracle wins and Google has to pony up lots of money to license the technology, it would probably just get absorbed by Google."

Oracle has reportedly asked Google Android handset makers to pay between $15 and $20 per handset to license technology for which the company claims it owns patents. It is suing Google, claiming that Android violates patents for Java, which had been developed by Sun Microsystems but are now owned by Oracle.

Meanwhile, Microsoft has been negotiating its own deals with handset makers that use the Google Android operating system, claiming that Google Android violates some of its patents that define the user interface and the operating system itself.

So far, HTC is the only major handset vendor licensing Microsoft's patents. And it's believed that Microsoft is charging the company about $5 per device for the software licenses. Microsoft has signed up four more licensing deals to smaller Android device makers. But it is suing two other, bigger Android device makers--Motorola and Barnes & Noble--which have refused Microsoft's terms.

Some experts speculate that the new fees may slow growth of the Android operating system. Google currently doesn't charge handset makers any fee to use the OS. But if Oracle and Microsoft are successful in their patent challenges or they manage to convince handset makers to license their technology, Android will be no longer "free."

"Can some amount of money change the dynamic of the mobile market?" said Jonathan Goldberg, an analyst with Deutsche Bank. "It won't stop Android, but it could slow the growth as handset makers consider other options in addition to Android."

Indeed, Microsoft and Oracle have the most to gain if handset makers choose to or are forced to license technology to use Android both in terms of licensing fees or in the case Microsoft, a market opportunity.

Breaking down the costs
There are several components that go into building a smartphone. The operating system is just a small part of the overall device, and even when it's licensed it only represents a small portion of the overall cost. In the grand scheme of things, a licensing fee for software on a smartphone may only account for about 5 percent of the total cost of the device, which at the midrrange and up to high end costs somewhere between $200 to $350 to build, when you consider volume discounts.

The screen is typically one of the most expensive components of a smartphone. And it can range in price depending on the size and quality from $20 at the low end of the scale to more than $50 in the high end. Memory also carries another big price tag, and can cost up to $50. Batteries are cheap, costing about $3 to $5, as is a camera, which is a few bucks.

Related stories:
• Oracle and Microsoft could cash in big on Android
• Oracle might seek fees from Android handset makers
• Report: Microsoft wants $15 per Android handset

Software licenses and fees are typically moderately priced. While these costs are always a negotiation, it's believed that Microsoft charges about $15 a phone to license its Windows Phone 7 software to hardware partners.

But these costs are not necessarily fixed, and as with any technology, component pricing is falling. The cost of Android phones has been rapidly declining--in fact, consumers can find Android phones from prepaid operators without a contract and without a hearty subsidy for less than $200. With rebates, some of these providers are offering Android phones for as little as $99 without a contract. Operators offering contract plans, are also selling Android phones at low prices too, sometimes giving away devices in two-for-one offers.

What this means is the cost of building these phones is declining rapidly and could offset the cost of the operating system license fee.

One area where pricing might be affected if the Android OS is no longer "free" could be at the very low end of the market. Adding $20 to $25 to a device that only costs $100 to make is significant. But most of the really inexpensive phones that handset makers are designing using Android will soon be targeted at the developing world. And U.S. patents wouldn't necessarily be enforceable in these countries, which means that handset makers would not necessarily have to pay licensing fees for the use of intellectual property on devices sold outside the U.S.

Handset makers aren't commenting on the news that Oracle has approached them asking them to license the Java technology. But even if the reports are accurate, Gold believes that Oracle would have offered a high price only as a negotiating point. Oracle also wouldn't want to stall the market.

"I'd be astonished if Oracle could actually get $20 per device," Gold said. "Its probably Oracle's starting point to negotiate a price, in my opinion, which would probably end up significantly less for high volume manufacturers."

He added that it also wouldn't make sense for Oracle to get a restraining order, which would limit production of Android phones and could give its competitors an opportunity to steal market share.

"If the litigation goes Oracle's way," Gold said, "they want to keep revenue coming in. So I think they want to make sure they are not disrupting the market too much."