Samsung paid Microsoft $1B last year in patent royalties related to Android

Samsung Electronics paid Microsoft (NASDAQ: MSFT) $1 billion last year to use Microsoft's technology in its mobile devices as part of a patent-licensing agreement, according to court documents filed by Microsoft. As part of a lawsuit Microsoft initiated against Samsung, Microsoft is claiming Samsung owes it $6.9 million in unpaid interest from last year.

In August Microsoft sued Samsung for violating a business collaboration agreement the two companies struck in 2011. According to Microsoft, Samsung has been using Microsoft's $7.3 billion deal to acquire Nokia's (NYSE:NOK) devices and services business as an "excuse" to break their business collaboration contract.

The actual suit was filed in early August but was just made public. "We are confident that our case is strong and that we will be successful," David Howard, Microsoft's deputy general counsel, said in a statement on Friday. "At the same time, Microsoft values and respects our long partnership with Samsung, is committed to it, and expects it to continue."

Under the terms of the September 2011 deal, the companies said they would cross license their entire patent portfolios, and Samsung agreed to pay Microsoft an undisclosed royalty fee for every smartphone and tablet it sells running Google's (NASDAQ: GOOG) Android platform. Samsung is one of more than a dozen companies that pay royalties to Microsoft for using Microsoft technology that is a part of the Android operating system. The technology includes common technologies such as displaying multiple windows in a Web browser. Interestingly, Microsoft's deal with Samsung also called for more collaboration between the two companies on Microsoft's Windows Phone platform.

Samsung has not responded to Microsoft's lawsuit and a Samsung spokeswoman for the company declined to comment Friday, according to the Wall Street Journal.

Meanwhile, Samsung is expected to report weaker third-quarter results as its smartphone business comes under pressure not only from Apple's (NASDAQ: AAPL) new iPhones, but also from lower-cost phones from Chinese rivals, such as Lenovo, Huawei, Xiaomi, ZTE and others.

According to Bloomberg, financial analysts who follow Samsung have been cutting their profit estimates almost daily, with at least 26 of 42 tracked by Bloomberg cutting their estimates in the past four weeks. The consensus is that Samsung's operating profit for the third quarter is projected to plunge 47 percent, while sales are expected to fall 15 percent. Both would represent the steepest declines in Samsung's financials since at least 2009. Samsung will provide guidance on its third-quarter results Oct. 7.

Samsung moved up the initial launch of its Galaxy Note 4 phablet to the end of September, meaning initial sales of the gadget will be recorded in its third-quarter results--possibly improving them. The phone will go on sale in the U.S. this month.

"We all know Samsung's third-quarter earnings will be pretty ugly," Daishin Securities Co. analyst Claire Kim told Bloomberg. Kim said that the inclusion of initial Note 4 sales in Samsung's third quarter financials "could give them a slight boost."

At the same time that concerns are growing about Samsung's ability to maintain its dominance in the smartphone market, the company is investing heavily in another line of its business: chipsets. Samsung said it will invest around $14.6 billion to construct a new semiconductor factory in South Korea, in its largest investment in a single plant.

Construction on the site at Pyeongtaek, around 47 miles south of the South Korean capital Seoul, will begin during the first half of 2015, and operations are scheduled to begin sometime during the second half of 2017. The new plant will make either logic or memory chips, Samsung said, adding that it has not yet made a final decision. The plant could signal Samsung's desire to build chips for wearables or smart appliances.

"Right now the only part of the company that is bringing in steady profits is the semiconductor division, so it looks like the company will keep investing in the business," IM Investment analyst Lee Min-hee told Reuters.

For more:
- see this Microsoft statement
- see this WSJ article (sub. req.)
- see this Re/code article
- see this Bloomberg article
- see this Reuters article

Related Articles:
Microsoft sues Samsung for breaching 2011 patent-licensing deal
Samsung expects mobile biz to recover quickly, plans second developer conference
Samsung unveils new Galaxy Note smartphones, Gear VR headset with wide carrier support
Samsung loses top spot in China to Xiaomi
Samsung's mobile sales and profit dip in Q2 amid intensifying competition from China

Correction, Oct. 7, 2014: This article incorrectly identified the agreement Microsoft's lawsuit is concerned with; it is a business collaboration agreement between Microsoft and Samsung.