One of the bigger announcements at Microsoft's Build conference on Tuesday was a plan to make Windows free on smartphones, handheld tablets, and small Internet-connected gadgets.
This is a major change in business model for Microsoft, which makes nearly a quarter of its revenue from licensing Windows to PC makers and consumers. Microsoft is effectively giving up that revenue on Windows Phone, and on Windows tablets with screens smaller than 9 inches.
The newly revealed "Windows for the Internet of Things," a version of Windows built for connected devices, such as wearables, speaker systems and even refrigerators, will also be free.
No free Windows for you!
One reason Microsoft isn't extending the deal to larger PCs--despite previous suggestions to the contrary--is obvious: The existing Windows licensing business is a cash cow. For all the doom and gloom about the traditional PC, vendors still shipped 315 million laptop and desktop computers last year according to IDC, mostly running Windows. There's no reason whatsoever for Microsoft to crater that business. (Though giving users free updates in perpetuity would be a nice touch.)
Besides, those traditional laptop and desktop users may be less inclined to buy apps from the Windows Store and use new Microsoft services such as Xbox Music, Xbox Video and Bing Smart Search. It's safe to assume many of those users are set on typical desktop applications instead, so there's less potential for Microsoft to make money after selling the copy of Windows, much less giving it away.
Different usage, different price
Smartphones and small tablets, however, are geared toward using apps, listening to music and watching video. With these devices, Microsoft has a much better chance of building an ecosystem, and in turn make money by selling apps, service subscriptions and content, hopefully making up for the lost Windows license sale.
With a free Windows license, phone and tablet makers can also lower the prices of their hardware to better compete with Android devices that are dominating in market share.
Manufacturers simply have to charge users more if they're paying for a Windows license. When you consider that Microsoft already receives licensing fees for every Android device shipped by most manufacturers, a truly free Windows license may end up being cheaper than a "free" Android license.
Lower prices are less of a necessity in the U.S. smartphone market, where carrier subsidies keep prices down already, but it could be a boon for overseas adoption. It may even pay off in the United States down the line, with Verizon, AT&T and T-Mobile now offering subsidy-free options.
And for tablets, it's a huge deal. Android tablets often sell for $200 or less, but Windows tablets are all priced at $250 and up, and that's partly because of licensing costs. (Windows 8's inability to run on less than 2 GB of RAM and 32 GB of storage is also a major factor, but those requirements will be halved in the spring update for Windows 8.1.) A free version may not be as necessary for larger tablets, because customers seem comfortable paying higher prices for these more laptop-like devices--and in any case, Microsoft has to draw the line somewhere.
Given that Microsoft isn't touching its traditional laptop and desktop licensing business, the free version of Windows hardly qualifies as a gambit. But it is a big bet that Microsoft's huge desktop and laptop licensing business will stabilize, freeing up the company to take more drastic measures in areas where it has struggled.