Oracle, Google Spar Over Java Patents for Android OS

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Trefis) -- Oracle ( ORCL) has just rebuffed a $2.8 million settlement offer by Google ( GOOG) for a lawsuit filed by Oracle which claims that the Android OS infringes on two key patents owned by Oracle pertaining to Java. Oracle rejected the settlement claiming it to be too low, covering only patents infringed and not the copyrights pertaining to the code used in the Android OS. In a filing made by Oracle in mid-2011, the settlement it expects is about $2.6 billion.

The case is likely to head to trial and if Google were to lose, it could potentially lead to heavy royalty payments and licensing fees in favor of Oracle.

Check out our complete analysis of Oracle

Are Android Revenues Fair?

While Oracle claims the true value of the patent infringement is about $2.6 billion, Google argued that the true value of the settlement is only about $2.8 million. Google agreed to pay a combined royalty of 0.515% for all Android devices sold from 2008 through 2011. That is 0.5% for a patent that expires on December 2012 and 0.015% for a patent that expires on April 2018. This translates to about $543 million in Android revenues from 2008 to 2011.

This figure seems a little understated considering the fact that Google takes a 30% cut on all apps sold in the Google Play market and has ads displaying on over 250 million android devices.

Upside Potential for Oracle

If the jury rules in Oracle's favor, Oracle could be looking at a settlement windfall anywhere from $1.4 billion to $6.1 billion. More importantly, it could have bargaining power while negotiating the Java licensing contact with Google.

Oracle would likely go for some sort of revenue share or royalty fee structure as Android is gaining a lot of traction and adding about 700,000 new users a day. If recent trends can be used as an indicator to assume a royalty fee of 2.25% of sales, there could potentially be an upside of 8% to 10% of our current $38 Trefis price estimate for Oracle.

Though it is highly unlikely to derail the Android OS, Apple ( AAPL) will probably keep close tabs on how this plays out in court.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.