Google Has Forced Microsoft to Change Its Business Forever

For as long as there's been Windows, Microsoft has charged for it. But thanks to Google, those days are over.

Apr 8, 2014 at 10:02AM

Last week, Microsoft (NASDAQ:MSFT) made a radical change to its business model, effectively doing away with the strategy that helped it dominate personal computing: Going forward, it will only charge OEMs for Windows licenses if the device in question has a screen size 9 inches or larger. In other words, Microsoft is now giving away Windows 8.1 and Windows Phone to tablet and phone manufacturers. It will still, however, charge for copies of the operating system installed on traditional PCs and laptops.

At least for now.

It's become abundantly clear that the days of charging for an operating system are rapidly coming to a close: By giving away Android, and to some extent Chrome OS, Google (NASDAQ:GOOG) has forced Microsoft's hand and has slowly destroyed its long-standing business model.

With Android and Windows, history repeats itself
Before the announcement, there had been widespread chatter that Microsoft had made (or was considering making) cuts to its Windows licensing fees. Although Android OEMs have to pay Microsoft royalties, Google doesn't charge for the mobile operating system, giving handset and tablet manufacturers a financial incentive to use it. The same is true for Chrome OS.

That puts Microsoft in a tough spot, as Google's operating systems have risen to dominate the globe. Gartner projects that Android will power more than 1 billion devices shipped this year. In contrast, IDC expects Windows PC shipments to come in at fewer than 300 million.

The whole episode is reminiscent of the browser wars in the mid 1990s, when Microsoft, by giving away Internet Explorer for free with a paid copy of Windows, more or less ran Netscape out of business. Before the introduction of Internet Explorer, Netscape had been charging $49 for a copy of its popular Navigator -- it found it quite difficult to compete with Microsoft's free alternative.

How much longer until Microsoft completely gives Windows away?
Microsoft doesn't plan to give Windows away for traditional PC and laptops users, but it seems inevitable that it will be forced to, at least eventually. There are 8-inch tablets on the market right now that sport full versions of Microsoft's Windows. While a bit less powerful, they could eventually cannibalize sales of competing low-end, Windows-powered laptops and desktops.

By cutting the Windows licensing fee to zero, Microsoft is giving manufacturers more room to price these devices aggressively, which could make them more attractive to consumers who had otherwise planned to buy a traditional laptop or desktop. Lenovo's ThinkPad 8, for example, is an 8-inch tablet with an HDMI-out port and docking capability -- attached to an external monitor, mouse, and keyboard, it could easily replace a traditional PC.

Putting aside potential intra-Windows cannibalization, Google is encroaching on Microsoft's PC dominance in other ways. Chromebooks, for instance, remain a small minority of global PC shipments (less than 1%), but have experienced rapid growth in the last year, particularly among educational institutions who turn to them in place of traditional laptops. Google's Chrome OS powered almost one-fifth of the laptops sold to K-12 schools in 2013, and its growth has been enough to solicit attack ads from Microsoft. At the same time, Android has made the jump from tablets and phones to a few desktop PCs, although this trend remains nascent.

A growing number of users are making smartphones and tablets their primary computing devices, eschewing traditional PCs altogether. With that trend in mind, last year analysts at Gartner predicted that, by 2017, Microsoft's Windows would be virtually irrelevant, replaced almost entirely by Android.

Microsoft without Windows
A free Windows could help to prevent that, but at what cost? Last year, Microsoft reorganized its divisions, obscuring Windows' performance by grouping it with other segments. Microsoft's devices and consumer licensing division includes Windows sales to OEMs, but also includes consumer Office sales and Android royalties. The enterprise licensing division includes Windows licenses sold to businesses, but also includes Windows Server and Office.

The last time Microsoft broke out Windows' performance was the fourth quarter of fiscal year 2013. Back then, Windows was generating about about one-fifth of Microsoft's revenue and one-sixth of its operating income. Presumably, both these figures will decline to zero in the coming years -- that's probably why Microsoft reorganized its divisions in the first place. Microsoft's without a for-profit Windows isn't necessarily a bad thing. If giving away Windows results in more market share, Microsoft can make up the difference by selling other software and services. Bing could finally turn a profit, as it's become more heavily integrated with the Windows operating system.

One thing is for certain: The days of charging for an operating are effectively at an end. With Android, and some to extent Chrome OS, Google has forced Microsoft to fundamentally alter its business model. For most of its history, Microsoft's business was built around selling Windows licenses -- those days are over.

Microsoft is spending hundreds of millions trying to beat Google to the punch
The tech world is changing. Microsoft may have missed out on the mobile revolution, but is betting big in an attempt to beat Google and Apple in the next big growth market. But if you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

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. It's also featured on several dozen 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 ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers