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Free Windows, end-of-XP spree, drops Microsoft revenue by US$455 million

Gregg Keizer | Feb. 4, 2015
Downturn shows the impact of shift in monetising strategy.

The reason for the decline in Windows licenses destined for consumer devices was even plainer: Microsoft has been handing out the OS to OEMs for free or nearly so. Since last April, Microsoft has given away Windows to device makers building smartphones or tablets with screens smaller than 9-inches. It followed that with "Windows 8.1 with Bing," a subsidized OS for tablets and notebooks that was either free or came with a minimal price tag.

Microsoft justified the free deals last week.

"Last spring, we made a strategic decision to introduce new Windows pricing programs to drive unit growth in opening price-point PCs as well as tablets," said Nadella.

Microsoft's strategy, dubbed "go low" by Computerworld, is to eschew licensing revenue to boost the pool of Windows users in the lowest-priced bands, including smartphones, tablets and inexpensive laptops. The latter have taken on Chromebooks, cheap notebooks powered by Google's Chrome OS, in the $199 to $249 range. In theory, growing the user base increases developer opportunity -- helping solve the Windows app gap on mobile -- and gives Microsoft a larger pool of people to sell services.

Microsoft has increasingly talked of monetizing Windows through channels other than licensing. Nadella hammered on that again last week, citing larger subscription tallies from Office 365 for consumers and increased revenue from Bing-based advertising and Microsoft's retail chain.

The risk, of course, is that Microsoft won't be able to generate enough revenue from post-purchase services or apps to make up what it loses by giving away or lowering the price of Windows.

"Windows is a big part of their business," said Adrian. "What replaces that?"

Answering that question is what drove Microsoft to offer free upgrades to Windows 10, analysts said. Devices running Windows 7 SP1 or Windows 8.1 Update -- the consumer, as well as the "Professional" or "Pro" versions -- will be able to upgrade to Windows 10 free of charge for a year after the new OS's official release.

Microsoft has pinned high hopes on Windows 10 as a primary monetization platform, enough that it wants to move as many customers as quickly as possible to the OS. "The most strategic objective for us is to get developer momentum with Windows 10 and that's where we're focusing," said Nadella.

Windows 10 is Microsoft's best shot, experts agreed. "This needs to happen as quickly as they can move their customers without negative reaction and disruption," said Adrian of Windows 10. "So far, it feels as if they're making the right moves and at the right time."

But not everyone sees roses.

Windows' inherent problem is that it skews to PCs -- Microsoft has an almost meaningless 3% share of the smartphone market and its tablet presence remains in the single digits -- and PCs will be up just 4% this year, according to Gartner.


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