John Chamberlain
Developer Diary
 Developer Diary · You Heard It Here First · 25 December 2003
Can Licensing Sustain Sun?
Can licensing fees sustain Sun while hardware profits dwindle? Lately Sun has been taking licensing fees more seriously. As revenues from hardware sales decrease, fees have increased. Licensing is especially attractive because it is so profitable. There are no raw materials or labor, just a check every quarter from all your customers. It's hard to beat that for a profit margin. The only question is whether the magnitude of the fees can be meaningful.

The amount of revenue Sun receives as licensing fees seems to be a closely guarded secret. Their balance sheet lists only "Computer Products" as a gigantic lump sum of six billion a year. This includes everything except services including licensing fees. A few years ago analysts estimated licensing to run around $100 million or more, but that number must have increased substantially. For example, there are something like 150 million Java-enabled phones with Sun getting probably about 0.25 cents per phone plus VM licensing lump sums for a total of at least $40-50 million. Then one can painstakingly try to estimate how much Sun makes from each licensee. For example, BEA lists $130 million in licensing revenue and $4 million in licensing costs most or all of which probably goes to Sun. Web Sphere is an even bigger pie probably taking in $600-800 million every year with Java licensing on the order of $20 million.

Overall it would not be surprising if Sun was making as much as $200-250 million in licensing fees. Unfortunately this is small potatoes compared to the $6 billion in hardware sales. Even if as many as 400 million Java phones get created and Sun raises its fees (as it probably will) it is hard to see more than $400-500 million as an upper limit to annual licensing fees over the next few years.

On the other hand Sun only makes about $1 billion in income off hardware (historically) now and both the revenues and the margins can be expected to decrease sharply (see my previous articles on that subject). A world where Sun was making $400 million in licensing income and $400 million in hardware is not implausible. A logical strategy for Sun might be to become a smaller, but higher profit company with emphasis on licensing and niche hardware. Psychologically a reverse growth strategy is difficult to accept but if Sun wants to maximize profits that might be the way to go.

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Developer Diary · info@johnchamberlain.com · bio · Revised 25 December 2003 · Pure Content