LG Agrees to Meet Microsoft’s Royalty Demand (MSFT, GOOG, AAPL, MMI, ORCL, NOK)

Korea’s LG Electronics has agreed to pay a licensing fee to Microsoft Corp. (NASDAQ: MSFT) for the right to use Microsoft claims it owns and that is required for all makers of smartphone handsets using the Android operating system from Google Inc. (NASDAQ: MSFT). Apple Inc. (NASDAQ: AAPL) and its iPhone are so far exempt from Microsoft’s claims.

The world’s largest software company has now signed agreements with handset makers Samsung, HTC Corp., LG, and eight other makers, which together manufacture about 70% of all smartphones using the Android operating system. So, while Google may give away Android, the operating system is no longer free. But Google doesn’t get any payment — checks are made out to Microsoft.

Microsoft has been pressing smartphone makers for months to pay up, and most have been doing so. Google has spoken out against all the patent lawsuits over mobile hardware and software, but the company is hedging its bets with its acquisition of Motorola Mobility Holdings Inc. (NYSE: MMI). Apple has been particularly aggressive in pursuing what it believes to be Google’s patent infringements. Another aggressive actor is Oracle Corp. (NASDAQ: ORCL), which acquired the patents and copyrights on the Java programming language when it acquired Sun Microsystems.

Google may end up having to compensate handset makers for the Microsoft fees, especially if the new Windows Phone operating system starts to encroach on Google’s lead in mobile platform software. Nokia Corp. (NYSE: NOK) is not the only smartphone maker that will be using the new Microsoft mobile operating system.

One thing that might happen is that Microsoft could agree to license Windows Phone at a lower price if a handset maker agrees to replace Android with the new Microsoft operating system. Google, which derives virtually all of its revenue and profit from advertising, must be able to grow its mobile advertising base and to do that it needs Android out there on as many smartphones as possible. It’s a jungle out there.

Paul Ausick