The Windows 10 "Start" menu. Image source: Microsoft.
When Apple decided to stop charging Mac owners for updates to OS X in late 2013, it threatened what had been a substantial piece of Microsoft's (MSFT 0.73%) revenue: Windows users had become accustomed to paying $100 or more to upgrade from one version of the OS to the next.
Microsoft has since ended its practice of charging consumers for Windows upgrades. This month alone, it has seen a rush of users downloading and installing Windows 10. That's smart of them; a newer, beefier version of the OS will cost enterprise users a $7-a-month subscription charge when it's released this fall.
Does it matter?
Known as Windows 10 Enterprise E3, the new OS will include an unspecified number of additions or enhancements. But the real enticement -- especially for businesses that use Windows as their primary computing platform -- is the promise of regular security upgrades. Subscribers will get the latest software as it's released.
For investors, the announcement reflects a shift in how Microsoft will collect and grow earnings in the years to come. Instead of selling chunks of software to retailers and computer makers, and collecting revenue at the point of purchase, the company will write contracts for access to "services," including the Azure cloud platform, the Office 365 productivity suite, and now, Windows.
Some contracts will naturally be bigger than others and include some upfront outlays, which means we can expect to see Microsoft accruing a significant balance of deferred revenue. In its fiscal second quarter, this "unearned" but very real revenue added $12.57 billion to cash flow from operations, up 23.2% year over year. Recognized revenue was up just 3%, and that's only if you account for currency effects and other adjustments.
All of which means -- whether the company chooses to admit it or not -- Microsoft is essentially copying the business model that's made Salesforce.com what it is today.
