The Sneaky Reason Microsoft Corporation Is Giving Away Windows Phone OS

Microsoft just made one of the smartest moves it could have in its pursuit of more smartphone relevance.

Apr 6, 2014 at 1:00PM

At its Build Conference, Microsoft (NASDAQ:MSFT) announced that it's going to start giving away the Windows Phone operating system for free to device makers that use it in smartphones and tables with screens smaller than nine inches. The company's pending purchase of Nokia (NYSE:NOK) is likely a big reason for the change, as is Microsoft's need to grab more smartphone market share. While this a big deal for Microsoft's long-term Windows Phone strategy, initially it's more of an accounting change than an actual benefit to investors.

Changing licensing structure
Of all the Windows Phone sales, Nokia makes up about 80% of them. That means the vast majority of licensing fees Microsoft collects -- about $15 per device -- comes from the Finnish company. Those fees are about to become an internal exchange once the acquisition deal closes between the two companies. So dropping the licensing fee per device doesn't impact the company as much as it would seem on the surface. Microsoft is expected to close the acquisition of Nokia's devices and services sometime this month, which would result in any licensing payments simply being moved from one account to another, but all under Microsoft's roof.

Expanding its reach
Right now, Microsoft holds just 3.2% of worldwide smartphone OS market share, with the obvious dominators being Google's Android and Apple's iOS. Microsoft is hoping to recreate some of the success of Android by offering up its OS for free. But as Google implemented its free-for-device-makers strategy years ago, it's likely Microsoft's impact will be much softer than Android's. 

But Microsoft is also tweaking its platforms so developers can make apps that work across Windows, Windows Phone, and even Xbox One. The cross-platform developing won't happen for another few months, but once it arrives it'll be another incentive for developers to spend time creating apps for Microsoft's systems.

What it really wants to sell
It's no secret Microsoft is well behind Apple and Google with its service offerings and app ecosystems. By dropping its licensing fees for Windows Phone, Microsoft is hoping to get more devices in consumers' hands, and then make money off them when they sign up for the company's services. That's one of the reasons why the company is giving away a free year of Office 365 to Windows Phone users. Microsoft wants to get users hooked on that service, as well as Skype and Bing.

It's hard to know how well this will pay off for Microsoft since Apple and Google have already built up strong services that tie users to their ecosystems. But it could have a real impact on the low-end market, where device makers now have an incentive to use an OS other than Android.

Foolish thoughts
As Microsoft has struggled to make significant progress against iOS and Android, I think this latest move is a big step in the right direction. It obviously encourages device makers to adopt the Windows Phone platform, while also opening up new opportunities for Microsoft to make money from its services. If you add to that the ability for developers to make apps that work across all of the company's platforms, then I think there's a lot of potential for Microsoft to grab more share of the smartphone OS market.

Microsoft is playing catch-up in mobile, but it can't afford to miss this
While Microsoft is tweaking its Windows Phone strategy to make up for years of lost time in mobile, there's another wave of tech the company needs to get ready for -- wearables. With Google's recent announcement of Android Wear, Microsoft is already one step behind. But that doesn't mean investors don't have to miss out on the new trend. Click here to get the full story in this new report.

Fool contributor Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple, Google (A shares), and Google (C shares). It also owns shares of 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.

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