Microsoft’s Free Windows Offer Is a Bold Move With Little Risk

Microsoft  (NASDAQ: MSFT  ) has been making a lot of news at its annual developers conference, but one of the bombshells to be announced is that Windows 8 will now be free to its OEM partners for devices with screen sizes below nine inches.

The move is Microsoft's attempt to if not staunch the growth of Google's  (NASDAQ: GOOG  ) Android OS at least grab a piece of the growing pie for itself. The company is also sweetening the deal by including a free one-year subscription to Office 365 to customers that buy the sub-nine inch screen devices.

"For partners, this makes it easier to bring more compelling devices to market. For developers, this means more endpoints for their apps in a store that's already growing at about 50% a year. And for consumers, it will mean a broader range of great smartphones and tablets at prices that will be competitive with anything on the market," Microsoft's Terry Myerson, who runs the company's operating systems group, wrote in a blog post April 2.

Is there a risk for Microsoft?

While giving away Windows for free seems counterintuitive when you consider that the Windows division has brought in over $18 billion in revenue for each of the last three years, Microsoft is not forfeiting that money -- it's trying to gain a foothold on a set of devices where it has very little market share.

In the tablet space Microsoft is showing slow growth but it lags dramatically behind Android and Apple's  (NASDAQ: AAPL  ) iOS. 

In the smartphone market, the news is similar. Microsoft is gaining customers but at a much slower pace than Android.

If Microsoft can get its partners to make Windows tablets and smartphones that consumers want, it should be able to make money off of those customers.

"Monetization would be through an enhanced ecosystem if this helps attract share at this end of the market, a larger potential market for Office 365, and through placement of Bing and Skype and other cloud services. About 60% of tablets are of this size and all smartphones, so clearly it is Microsoft's effort to remove any friction in attracting developers and partners in this market, and some revenue is better than essentially none today," Nomura analyst Rick Sherlund told his clients, according to Geekwire.

More customers is good for Windows 8

Besides the obvious benefit of being able to sell products and services to an expanded user base, more Windows users makes the platform more attractive for app developers. One of the key complaints about Windows Phone and Windows 8 on a tablet is the lack of apps.

Microsoft has actually paid app developers to create apps for its OS but some popular apps have not been ported over. Even Microsoft's neighbor in Seattle, Starbucks (NASDAQ: SBUX  ) , has yet to offer its pioneering app on Windows (it's available on Android and iOS devices). But Microsoft did shell out big bucks to bring name apps including Pandora (NYSE: P  ) and Temple Run to Windows 8. Microsoft also has a program where it rewards regular, non-famous developers for building Windows app with free stuff and cash.

The market for apps is only getting bigger. In 2012, 57 billion apps were downloaded for free, whereas paid app downloads amounted to 6.65 billion items. In 2017, free app download volume is projected to grow to 253 billion downloads with paid rising to 14.78 billion, according to Statista.com. If Microsoft has a larger share of consumers using its devices, it would be able to claim more app downloads (and even free apps offer monetization possibilities through in-app purchases). It's not how Microsoft has made money in the past but it needs to be part of the company's future.

Microsoft loses nothing here

With so many one-time PC users moving to tablets and smartphones for at least some of their computing needs and a generation growing up that was never tied to traditional desktops and laptops, Microsoft needs a strategy to broaden the audience for Windows. Windows 8 was actually designed specifically for use on tablets and getting more products out to consumers running the OS makes sense. The same goes for Windows Phone 8, which is an elegant operating system that has a number of features that might make it appeal to consumers over Android. 

Microsoft is currently only a bit player in the tablet and smartphone markets. Just giving Windows away won't convince consumers to buy devices running it but it's a major step in the right direction. Microsoft also has spent lavishly to advertise Windows 8 but the early machines running it -- even the tablets -- were on the pricier side closer to iPads than, say, the Android-powered Kindle Fire.

Making Windows free on devices with screens under nine inches should lead to Windows tablets at lower price points. That is good news for consumers who felt the Surface and other early Windows 8 tablets were too expensive and it should be good for Microsoft and its partners. 

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