Microsoft forms patent agreement with HTC, will receive royalties for all HTC Android phones

In a surprising move this morning, Microsoft announced that it has formed a patent agreement with cellphone manufacturer HTC. The deal gives HTC coverage under Microsoft’s patent portfolio for its Android phones, and Microsoft will receive royalties from the company in exchange.

While the agreement could be seen simply as Microsoft extorting money from HTC to avoid another patent lawsuit (like the one it’s currently dealing with from Apple), HTC is also getting something out of it. It gives the company access to a potentially strong portfolio of patents that is far beyond anything Google could offer, and positions it with Microsoft against patent grievances from Apple.

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While Microsoft’s press release didn’t go into why it decided to form this agreement with HTC, sources close to the company say that Microsoft believes Android violates its patents, Cnet reports. The company wouldn’t say what Android was infringing, but it could be related to its legal posturing against Linux, which Android is based on.  Microsoft deputy general counsel Horacio Gutierrez told Cnet that the company prefers to handle IP issues without lawsuits, but added that “competitors do not free ride on our innovations.” Word is that Microsoft is targeting other Android manufacturers as well.

The strangest thing about this deal is that we now live in a world where Microsoft will be earning money from every HTC Android device sold, including Google’s own Nexus One. HTC has thus far been Google’s primary hardware partner — the company also developed the T-Mobile G1 (the first Android phone), the MyTouch 3G, and the upcoming Evo 4G.

All of this is bad news for Apple. HTC now has help from Microsoft against Apple’s patent lawsuit, and if other Android manufacturers follow HTC’s lead, Microsoft could start benefiting directly from Android’s success.

In a strange way, the move makes complete sense for Microsoft. Its upcoming Windows Phone 7 platform doesn’t have much of a chance at destabilizing Apple’s command of the smartphone market — but Android’s presence across multiple carriers and handset manufacturers certainly gives it a better shot. If Android is going to be the new dominant platform, Microsoft might as well make money off of it (while kicking Apple in the shins).

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