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Microsoft's Finnish headquarters in Espoo. Photograph by VESA MOILANEN AFP/Getty Images

Why Microsoft’s New Deal With Lenovo Matters

Aug 23, 2016

Microsoft makes a lot of money from Android, thanks to its patents being used in Google's operating system. That income has recently been faltering due to a fall in shipments of smartphones whose manufacturers have struck licensing deals with Microsoft.

However, Microsoft (msft) is still striking patent deals, and the latest one is with Lenovo (lnvgy). Apart from the cross-licensing nature of this agreement, announced Monday, Lenovo will also preinstall core Microsoft apps on some of its premium devices.

It's not clear precisely which devices these will be, but Lenovo promised to ship millions of them over "the next several years."

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The apps include Microsoft Office, the OneDrive cloud storage service and Skype. Of course, encouraging people to use these services could also aid Microsoft's profitability.

Recent years have seen similar deals struck between Microsoft and manufacturers including Asus (asuuy), Samsung (ssnlf), LG (lgcey) and Xiaomi.

Motorola, which Google (goog) sold to Lenovo in 2014, was once a notorious holdout when it came to paying Microsoft over Android intellectual property. The new deal covers Motorola devices too.

"Microsoft's thrilled that our productivity apps will be pre-installed on Lenovo's premium devices," said Microsoft corporate vice president Nick Parker. Meanwhile, Lenovo corporate alliances chief Christian Eigen said the pre-installation deal would "bring additional value to consumers around the globe."

For more on patents, watch our video.

The companies' app arrangement is notable, but it's really the continuing expansion of Microsoft's licensing program that's the big deal here. Microsoft's most recent quarterly results showed a 27% year-on-year drop "due to a decline in license revenue per unit and licensed units."

Given that Microsoft was estimated to be pulling in $2 billion a year from these deals a few years back, that's a lot of money going out the window. And it's probably because Chinese manufacturers such as Huawei, Oppo and Vivo, who are riding high in the smartphone charts right now, don't have Microsoft licensing deals.

Lenovo's stature in the mobile market is shaky, having recently experienced a 33% decline in sales—again, thanks to those other rising stars in China. However, it could still bounce back, and is therefore an important win for Microsoft.

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