Rumors about Microsoft (NASDAQ:MSFT) turning Windows 10 into a paid subscription service floated around after the company launched free upgrades for Windows 7, 8, and 8.1 users within the first year of the new operating system's release, from July 2015 to July 2016. The rumors were based on the idea that Microsoft would first lock in users with a "free" Windows 10 upgrade and then launch paid subscriptions that would replace traditional Windows license fees.
Many assumed that consumers who didn't pay would be locked out of their own computers. Those rumors gradually faded away, but they resurfaced in a recent ZDNet report claiming that Microsoft would launch a new subscription service called Microsoft Managed Desktop (MMD) for Windows 10.
MMD is a "desktop as a service" that will let customers lease a Windows 10 device, which will be automatically provisioned for them and updated for a single monthly fee. This once again sparked claims that Microsoft would hold users' PCs hostage unless they paid monthly fees.
Yet this wasn't the case -- MMD is merely a paid service for enterprise customers, designed to address complaints about Microsoft's twice-per-year OS updates disrupting IT deployment schedules. Simply put, MMD isn't designed for mainstream consumers. Looking ahead, it's highly unlikely that Microsoft will ever turn the consumer version of Windows 10 into a paid service for five simple reasons.
1. It would help its rivals
Abruptly turning Windows 10 into a paid service would make Microsoft's "free" Windows 10 upgrade look like the ultimate bait-and-switch strategy. It would cause consumers to flock to rival platforms, like Apple's macOS, which has received free upgrades for nearly five years, or Alphabet's Chrome OS, which has always been free.
2. Fragmenting the Windows market
Consumers who use older versions of Windows might refuse to upgrade to Windows 10 if it were made into a subscription service. That would contradict the original goal of the free Windows 10 upgrade program: to reduce the fragmentation of the Windows market and get all its users on the same page.
Windows 10 runs on just 47% of all Windows PCs worldwide, according to StatCounter. Windows 7 ranks second at 39%, followed by Windows 8.1 at 8% and Windows XP at 3%. It makes no sense to lock out those older Windows OS users.
3. Windows 10 isn't free anymore
Microsoft never offered Windows 10 as a free upgrade to enterprise users, who always had to purchase multi-year business licenses. That's why its Windows Commercial revenues rose 23% annually last quarter.
As for mainstream consumers, the free upgrade plan ended two years ago, and a fresh copy of Windows 10 costs between $140 to $200, depending on the version.
4. Microsoft generates Windows revenues from OEMs
Generally speaking, only customers who build their own PCs would need to buy fresh copies of Windows 10. When it comes to store-bought PCs with Windows preinstalled, OEMs purchase Windows licenses from Microsoft instead. A recovering PC market notably boosted Microsoft's OEM revenues 7% annually last quarter.
Since Microsoft already gets a cut of every Windows PC sold, it would be foolish to alienate customers by adding monthly subscription fees to the OS. That, in turn, would hurt OEMs and might prompt them to consider switching to other operating systems.
5. Microsoft has many other ways to monetize Windows 10
Under CEO Satya Nadella, Microsoft pivoted from selling new licenses for Windows every few years to monetizing various parts of the operating system. Microsoft already takes a cut of apps and media sold through the Microsoft Store, generates ad revenues by adding "suggested" apps to the Start Menu, and heavily promotes the use of first party services like Bing, Cortana, OneDrive, and Office 365.
It's doubtful that Microsoft will risk losing all those revenue streams by locking out mainstream consumers with a monthly subscription fee. Doing so would cut users off from its cloud-based services -- which it needs to expand to keep pace with Google.
The real value of Windows 10
Turning Windows 10 into a paid subscription service for mainstream consumers would undermine Microsoft's long-term goals. Microsoft is using Windows 10 as a foundation on which to build new pillars of sales growth, which will reduce its dependence on license upgrades. Turning the OS itself into a subscription platform would wreck those plans. As a result, it is likely that Microsoft will maintain the status quo with regard to Windows 10's sales model.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Leo Sun owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.