Should Microsoft Investors Worry About a Free Version of Windows 8?

Microsoft is reportedly considering offering a free or low-cost version of Windows 8.1 in an attempt to boost the number of users, potentially threatening one of Microsoft's biggest cash cows. But the long-term benefits will likely outweigh the costs.

Mar 16, 2014 at 2:00PM

Windows has long been a cash cow for Microsoft (NASDAQ:MSFT), with nearly every PC sold to both consumers and businesses coming with a license for the operating system. But the rise of tablets, smartphones, and the cloud has put pressure on Microsoft's venerable OS, and the way that people interact with computing devices has fundamentally changed. Recent reports that Microsoft is considering offering a free or low-cost version of Windows 8, along with a cut to the Windows license fee for devices that retail for less than $250, is a step toward the company's goal of shifting from a software company to a devices and services specialist. But with Windows making up a big chunk of Microsoft's profit, and with Google's (NASDAQ:GOOGL) Android and Chrome OS operating systems representing the first real threat to Windows in years, should Microsoft investors be worried?

Why is Microsoft doing this?

Chromebook

A Samsung Chromebook. Source: Samsung.

Chromebooks, laptops that use Google's Web-based Chrome OS, make up a tiny fraction of the total PC market. In 2013, just 2.5 million Chromebooks were sold, representing about 1% of the global PC market. Windows still has a lock on the market, but the problem is that the market is contracting.

The low end of the PC market is being cannibalized by low-cost tablets and, to a lesser extent, Chromebooks, and the fact that the Android operating system is free means a comparable Windows-based device will be priced at a premium. While there's no real threat of Microsoft losing the personal computer market as a whole anytime soon, the first computing device for many people is no longer a Windows PC. If Microsoft lets this continue, the long-term implications could be disastrous.

Part of the purpose for Microsoft considering a free or low-cost version of Windows 8.1 is to make low-end Windows devices price-competitive with Android devices and Chromebooks. Since Microsoft derives most of its profit from the enterprise, not the consumer, the loss of licensing revenue shouldn't be all that meaningful, as I suspect the low-cost version of Windows 8.1 will offered only for consumer devices. The benefit likely outweighs the cost, bringing Windows laptops into the $200 range that Chromebooks sell for, as well as making Windows-based tablets and convertibles more attractive.

It's no secret that Windows 8 has been a tough sell, with the 8 and 8.1 versions only representing about 10% of all PCs using Microsoft operating systems. Windows 7 still accounts for 47% of Windows PCs, while the aging Windows XP claims nearly 30%. As consumers and businesses move on from Windows XP, there's a very good reason for Microsoft to want them to choose Windows 8 instead of Windows 7. In one word: services.

The future of Microsoft depends not on selling one-off licenses, but on monetizing its myriad of services. Office 365, the subscription-based version of Microsoft Office, in one example of this trend, and increasing the number of people dependent on Microsoft services is likely the real point behind lowering the cost of Windows 8.

Onedrive

Source: Microsoft.

A good example is Microsoft OneDrive, formerly known as SkyDrive, Microsoft's cloud storage and syncing service. OneDrive offers the same functionality as services such as Dropbox and Google Drive, and it's built into the Windows 8 file system, making it convenient for users of that OS. There's little reason to use it without a Windows 8 device, even though Android and iOS OneDrive apps are available. It's clear that boosting the number of Windows 8 users will also drive people toward Microsoft services, and achieving this is probably worth the short-term revenue hit.

Along with a lower-cost version of Windows, Microsoft also aims to boost the number of users of its services by offering benefits to those using more than one service. OneDrive offers seven gigabytes of storage for free, more than Dropbox's 2 GB, but an another 20 GB of space is given to Office 365 subscribers. Additional storage can be purchased at significantly lower rates compared to Dropbox, with 100 GB on OneDrive costing half as much as 100 GB on Dropbox.

The takeaway
Boosting the number of Windows 8 users is the key to Microsoft's long-term strategy of monetizing its services, and a low-cost version should help drive upgrades from Windows 7 and Windows XP. Since Microsoft derives most of its profit from the enterprise segment, this move shouldn't have much of an effect on the bottom line, and the benefits will likely greatly outweigh the costs. Investors should be happy that Microsoft is getting serious about boosting Windows 8 adoption, not worried about the short-term effects.

How to take advantage of the cloud
There are few things that Bill Gates fears. Cloud computing is one of them. It's a radical shift in technology that has early investors getting filthy rich, and we want you to join them. That's why we are highlighting three companies that could make investors like you rich. You've likely only heard of one of them, so be sure to click here to watch this shocking video presentation!

Timothy Green owns shares of Microsoft. The Motley Fool recommends Google. The Motley Fool owns shares of Google and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers