Microsoft may be one of the only remaining mobile operating-system providers that charges handset makers a licensing fee, but in exchange vendors get at least one important benefit: protection from intellectual property worries.
That could be one reason that Samsung, HTC and LG are willing to pay to use Windows Phone 7, but it doesn't appear to be enough to convince other former Windows Mobile users, like Motorola, to commit to the operating system. The fee could also reduce the number of models that handset makers build using the software.
The first phones running Microsoft's revamped Windows Phone 7 software are expected to come out in October. The majority of early reviews of demo phones have been positive. But Microsoft has tough new competition from the popular iPhone and the fast-growing Android platform.
Despite that competition, Microsoft is in the unique position of being the only remaining major smartphone operating-system developer that charges for the use of the software. Android and Symbian are both free. Palm, recently bought by Hewlett-Packard, no longer licenses its operating system to other manufacturers. Apple and Research In Motion have their own software that they use exclusively on their own hardware.
Microsoft says there are some clear advantages for handset makers that pay for the operating system.
"Our hardware partners are lining up to deliver these phones because they know free is never really free," a Microsoft spokesperson said through the company's public relations representative. "When you're creating a phone, the cost of licensing the operating system is only the beginning, because there are plenty of other development costs."
While Microsoft offers support to handset makers as they integrate the software into their hardware, developers of free operating systems, like Google, don't. Some hardware vendors using Android have said that investment can be significant.
Microsoft also offers "a better managed and coordinated ecosystem that might improve the chances of success for the entire platform," said Al Hilwa, an analyst with IDC. Microsoft's closely controlled environment leaves little room for the fragmentation that is plaguing Android.
But one of the most important things that Microsoft may offer handset makers in exchange for the licensing fee is intellectual property protection.
"Microsoft indemnifies its Windows Phone 7 licensees against patent infringement claims," the company said. "We stand behind our product, and step up to our responsibility to clear the necessary IP rights."
That could become a key differentiator for the company.
"Microsoft has one of the largest IP portfolios out there, so you are very well-protected," said Chris Hazelton, an analyst with The 451 Group.
Hilwa agrees. "The Java/Android lawsuit highlights some of the risks of not having IP protection," he said via e-mail.
In August, Oracle sued Google, saying that the way Android handles Java infringes its patents. While the suit could take years to settle, it has some people worried about whether someone -- Google or handset makers -- will ultimately be on the hook for licensing intellectual property.
Oracle isn't the only company threatening Android. Earlier this year HTC said that it had licensed patents from Microsoft for use in the phone maker's Android products. Microsoft said that it was talking to other vendors too about its concerns related to the use of Android.
It's not clear how much IP indemnification is worth to handset makers. Microsoft declined to reveal how much it charges to license its mobile OS. Hazelton has seen estimates as high as US$12 per phone for previous versions of Windows Mobile. "That's quite a bit of money when you're talking about a handset where margins may be pretty thin," he said.
But current market circumstances and other factors could be forcing that fee lower, he said. Microsoft could offer vendors discounts for preventing end-users from switching the default search engine away from Bing, for example.
Other factors could ultimately impact the licensing fee too. "It may well be that Microsoft has to tinker with these fees over time as its monetization strategy becomes more sophisticated around apps, content, advertising, mobile payments, etc.," Hilwa said.
Despite the benefits, some handset makers may think twice about releasing lots of Windows Phones because of the fee.
"The fact that device makers have to pay for [Windows Phone 7] OS licenses is definitely going to give some pause," Hilwa said.
Motorola, which has used Windows Mobile in the past but has most recently focused almost exclusively on Android, sounds unlikely to make Windows Phone 7 devices. In response to questions about plans to make Windows Phone 7 devices, Motorola said that it remains focused on Android.
Motorola has built on top of Android in an effort to differentiate its products, something handset makers can't do with Windows Phone 7. "If you want to differentiate, the issue is you can't build on top of Windows Phone 7," Hazelton said.
The benefits of paying the licensing fee don't appear to be clear to Motorola. "Microsoft has a value-based model. Their perception is that they create value in the OS and people will pay. That's a fine point," said Sandeep Sinha, a director at Motorola, at the TechNW conference in Seattle on Monday. "Right now, I don't know the value between Windows Phone 7 and Android."