The Rumors Were True: Microsoft Drops Windows Fee to $0 on Devices

This story originally written by Nancy Gohring at CITEworld. Sign up for our free newsletter here.

In a major departure from its historical business model, Microsoft this morning said that it plans to make Windows free for phones and tablets with screens smaller than nine inches. Terry Myerson, executive vice president of operating systems at Microsoft (NASDAQ: MSFT  ) , made the announcement this morning during Microsoft's Build conference for developers in San Francisco.

The result may be that handset and tablet makers may be more inclined to develop new devices based on Windows and Windows Phone.

Microsoft has confirmed that the deal extends to all versions of Windows for consumers, including Windows Phone, Windows 8.1 and Windows RT, as long as they're preinstalled on devices under 9 inches in screen size.

Prior to today, Microsoft has never disclosed just what it charges vendors to use its Windows Phone operating system. Reports vary, ranging up to $15 per phone. That has put Microsoft in a tough position given that Android comes to OEMs free of cost. The same is true for Android on tablets, where Microsoft reportedly charges at least $30 for full Windows, regardless of device size.

Given Microsoft's position in the mobile market -- its smartphone market share is tiny, around 4 percent -- it doesn't make sense for it to put up that kind of barrier for OEMs.

Since Windows has been a primary source of revenue for Microsoft, dropping the licensing fee is tricky business. The company has to make up for that revenue stream in some way. That's driven the company's strategy in rolling out new types of apps that might generate revenue from advertising or subscriptions. Bing, Skype, Office, and Xbox are just a few of the products built into Windows Phone. Microsoft may figure that it can generate enough from those other opportunities.

Rumors late last year, reported by Bloomberg, had Microsoft in talks with HTC about a free version of Windows Phone. Microsoft never confirmed the idea though.

Free Windows Phone software for OEMs won't necessarily translate into cheaper phones for users. The more important impact would be if OEMs decide it makes more sense to bet on Windows Phone because of the lower cost, resulting in the development of more Windows Phone models.

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