Microsoft's Ballmer: 'Nothing Free About Android'

Microsoft CEO Steve Ballmer seems unimpressed with the progress Google's Android operating system has been making in the mobile space. In fact, he's of the mind that Android comes with plenty of associated costs due to its reliance on Microsoft patents.

In a video interview with Fortune last week, Ballmer suggested that the fast growth of Google's Android mobile operating system should be weighed against its patent licensing implications.

"There's nothing free about Android … as we certainly have asserted in a number of cases, there's an intellectual property royalty due on that," Ballmer said. "Whether they happen to charge or not for their software is their business decision."

It wouldn't be much of a stretch to say that Microsoft is getting frustrated with the industry lovefest that's building around Android. Google's I/O conference last week was dominated by Android 2.2, code named Froyo, which added Flash support, Wi-Fi tethering and faster performance, as well as Microsoft Exchange support.

What's more, Google's I/O event came on the heels of an NPD Group report that showed Android overtaking the iPhone for the number two spot in smartphone unit sales. Android is hot, and the contrast to Microsoft's mobile situation couldn't be more dramatic.

Windows Phone 7 may help, but devices running it won't arrive until some as-yet undefined timeframe later this year. Meanwhile, Apple is likely to unveil a new, fourth generation iPhone at next month's Worldwide Developer Conference, and other handset vendors aren't going to be twiddling their thumbs either.

Although Microsoft's partners are confident that Windows Phone 7 will help right the ship, they're not underestimating the significance of what Google has achieved with Android. Scott Stanfield, CEO of Vertigo Software, a Richmond, Calif.-based Microsoft partner, sees Android as a threat to Windows Phone 7 in Microsoft's traditional comfort zone of the enterprise.

"Now you have a platform that Java developers can work with, unlike iPhone which is Objective-C," Stanfield said. "We can’t count Microsoft out yet: from what we’ve seen, Windows Phone 7 will be their best phone yet. But is it too late?"

Andrew Brust, chief of new technology for twentysix New York, a Microsoft solution provider in New York City, says Google's success with Android stems from borrowing elements from the Microsoft Windows Mobile model and then adding its own improvements in specific areas.

"Android took Microsoft’s software-plus-OEM approach and added far superior Web browsing, good cloud services integration and an open developer platform and market," Brust said. "Google's reward for taking that risk is that they now have a product that the market likes better than Windows Mobile 6.x."

Next: Microsoft's Mobile Market Share Takes A Hit

Windows Phone 7 has met with positive response from partners, but Microsoft's share of the mobile OS market has been steadily dwindling: According to Gartner's most recent figures, Windows Mobile devices accounted for 6.8 percent of worldwide smartphone sales in the first quarter, compared to 10.2 percent in last year's Q1.

This places Windows Mobile fifth behind leader Symbian (44.3 percent), Blackberry (19.4 percent), iPhone (15.2 percent) and Android (9.6 percent), according to Gartner. But Android's market share was 1.6 percent in last year's Q1 and the iPhone's was 10.5 percent. Symbian and Blackberry fell year-on-year, but no one's losing share as fast as Microsoft.

The bigger problem for Microsoft, according John Gruber, author of the Daring Fireball blog, is that its mobile business model depends on a dominant share of the mobile market -- something it no longer possesses.

"Microsoft can’t afford for its mobile platform to account for just a sliver of the industry’s unit sales. Their licensing model is all about volume -- low per-unit profits multiplied by an enormous number of units. They’re not selling $400-600 phones, they’re selling $8-15 licenses for an OS," Gruber wrote in a blog post over the weekend.

One ray of hope for Microsoft is that the mobile market is still relatively young, and if Android can post such remarkable market share gains in a short time, there's certainly a chance that Microsoft could follow suit.

Whether or not Microsoft will regain its former leadership status is an open question, but Brust says the software giant has historically done some of its best work when playing the underdog role.

"I think Android’s competitive force -- as well as Apple’s -- is what’s catalyzing Microsoft to build such an innovative new phone platform," Brust said. "Competition is good, and the mobile industry is exciting and dynamic. Steve Ballmer knows that Microsoft does its best work under heavy competitive pressure."

This article updated 5/24/2010 at 6:00 p.m. Pacific time to clarify interpretation of Ballmer's comments on Android