Microsoft makes much more money from Android than Windows Phone. Every time you buy an Android smartphone or tablet, Microsoft is likely receiving $5 to $15. They likely make at least $2 billion per year from Android.

This financial agreement is all about patent royalties. Microsoft claims to hold software patents that Android infringes on, and they threaten lawsuits against Android device manufacturers until they settle.

How the Licensing Agreements Work

Microsoft has never officially revealed the details of their licensing agreements with Android device manufacturers. We’re piecing together all the information here from multiple sources.

We do know that Microsoft tells Android device manufacturers that Android infringes on their patents. To make things right, the device manufacturer needs to cut Microsoft in on the devices it sells. If the device manufacturer won’t enter into a patent licensing agreement, Microsoft will likely sue them.

While Microsoft hasn’t given us all the information we need on these licensing agreements, their corporate lawyers did release an interesting blog post about this subject back in 2011. They explain Microsoft’s philosophy when it comes to negotiating patent agreements with Android device manufacturers:

“Amidst continuing clamor about uncertainty and litigation relating to smartphone patents, we’re putting in place a series of agreements that are reasonable and fair to both sides. Our agreements ensure respect and reasonable compensation for Microsoft’s inventions and patent portfolio. Equally important, they enable licensees to make use of our patented innovations on a long-term and stable basis.”

In 2012, Microsoft announced that 70% of Android devices sold were now covered by their patent licensing agreements.

How Much Are the Royalties?

Microsoft and Android device manufacturers haven’t officially released any information on how much these patent royalty fees cost. Manufacturers are likely prohibited from releasing these details as part of the agreements. However, according to a Citi analyst, HTC is paying Microsoft $5 per Android device sold. The same analyst revealed that Microsoft was suing device manufacturers for $7.50 to $12.50 per Android device sold.

In 2011, a story in the South Korean Maeil Business Newspaper indicated that Microsoft was trying to get $15 per Android device sold from Samsung, while Samsung was trying to argue them down to $10.

The $2 billion per year figure an analyst came up with estimates that Microsoft is getting $5 per Android device sold. If they’re getting more on average, they may be receiving more than $2 billion per year from Android device sales. And, if Android device sales continue to increase, they could be making many more billions of dollars a year soon.

Wait, Why Are Device Manufacturers Paying Microsoft?

If you’re someone who’s not versed in patent law, the question you’ll be asking at this point is why? Why exactly does Microsoft deserve to pocket so much money from each Android device sold? More specifically, what Microsoft patents does Android infringe on? We don’t know for sure.

In reality, Microsoft has never had to defend their Android patents in court. Rather than risk an expensive court battle with Microsoft, Android manufacturers just pay Microsoft for a license so they can get on with business. It’s generally cheaper to pay off “patent trolls” than to fight them in court, and this is even more true for a company with cash reserves as big as Microsoft’s.

Microsoft holds a variety of software patents, including patents essential to using the standard FAT file system SD cards are formatted as by default.

The FAT Patent

While we don’t know all the patents in question here, we do know some in particular. One particular patent in question is often referred to as the “FAT patent.” In a nutshell, Microsoft’s File Allocation Table (FAT) file system, which goes back to MS-DOS, supports long and short file names. There are longer names like “MyDocument.doc” and legacy eight-character DOS file names like “MYDOC~1.DOC”. Microsoft’s patent is on a “common name space for short file names.” To implement FAT support — so they can read standard SD cards supported as FAT32 for example — devices need to support that FAT file system and this implementation detail. The European version of this patent was recently ruled invalid by a German court.

Microsoft has been using this patent against Linux devices since 2003. In 2009, they sued TomTom for violating two of their patents on the FAT file system. TomTom used the Linux kernel in their GPS devices, and Microsoft argued that the FAT support in the Linux kernel infringed their patents. Rather than going to court, TomTom settled and paid Microsoft patent royalties. Microsoft has always argued that Linux infringed their patents, so it’s no surprise they argue Android — built on Linux — does too.

One company that did try to fight back against Microsoft was Barnes & Noble. Microsoft argued that the Nook — an Android-based eReader — infringed their patents and that Barnes & Noble should pay up. Things were reportedly looking good for Barnes & Noble in court, but Microsoft settled with them in 2012, with Microsoft investing $300 million in a Barnes & Noble subsidiary and granting them patent rights. Microsoft’s patents lived to fight another day.