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With Free Version of Windows, Microsoft Gives In to the Google Way

By Wired – Mar 5, 2014 at 2:41PM

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Microsoft may be testing out a bold new pricing strategy with its flagship Windows operating system.

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Microsoft (MSFT -1.51%) is slowly transforming itself into something that looks a lot like Google (GOOGL -2.30%).

It's not just that Microsoft is very much a player in web search, after five years at the helm of Bing. It's not just that the tech giant is betting big on cloud computing with services like Office 365 and Windows Azure. Microsoft, it seems, is also following in the footsteps of Google operating systems such as Android and Chrome OS. Last week, The Verge reported that Redmond is preparing a free version of Windows 8.1, its latest operating system for desktop and laptop PCs.

Google offers free OSes to computer and phone makers as a way of driving the use of its search engine and countless other web services, and now, Microsoft is at least experimenting with the idea of doing much the same thing. According to the report, its free operating system is known as Windows 8.1 With Bing. As the name implies, the OS is meant to feed the use of Microsoft's own search engine, as well as other Microsoft cloud services and software applications.

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It's also the surest sign yet that Microsoft realizes it must significantly reduce the price of its Windows OSes in order to compete in the modern world, where free OSes are everywhere. Even Apple (AAPL -1.34%) now lets you upgrade to the next version of its desktop OS for free. For decades, much of Microsoft's revenue has come from its desktop and mobile operating systems, but it's now willing to give up on at least some of these OS revenues to ensure that its software stays relevant.

Windows 8.1 with Bing is just one example. Other reports indicate that Microsoft will drastically reduce OS licensing prices for low-end laptops and that it's considering free versions of its phone and tablet operating systems as well.

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This apparent shift in philosophy is certainly the best way for Microsoft to compete for a place on desktops, laptops, phones, and tablets. The question is whether Microsoft is nimble enough to give up at least some of its Windows revenues — which have been so important to its business for so long — and then make up for the drop with ad revenues and subscriptions, the stuff that has long fueled the Google empire but that Microsoft has traditionally been less comfortable with.

Microsoft misses mobile
For anyone who remembers Microsoft at its 1990s zenith, when it ruled over more than 95 percent of personal computing devices and utterly dominated the software business, this new philosophy is nothing less than amazing. Once upon a time, Microsoft collected a hefty tax on nearly every little desktop and laptop computer sold, and its whims could decide the fate of even large PC manufacturers.

But then mobile happened. These days, far more smartphones and tablets are sold than PCs, and relatively few of them run Windows. Instead, they run Apple's iOS or Google's Android, the only two platforms that matter on mobile. Obsessed with the importance of its era-defining desktop operating system, Microsoft lost the battle to run the little computers of the future — almost before the fighting was under way.

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Eventually, Microsoft came up with a nifty — and even influential — mobile operating system, but it was too late. The problem for Microsoft wasn't merely that Apple and Google ruled most smartphones and tablets, but that their mobile OSes were free, subsidized by hardware sales in Apple's case and by advertising in Google's case.

But Microsoft was still so dependent on operating system sales for revenues. OS sales were once nearly half of its revenue, and though, by 2012, they only accounted for a quarter, old habits have died hard. Microsoft was so determined to force people onto paid versions of Windows, it seems, the company would often go to extreme lengths to boost their appeal without removing the price tag. According to reports, former CEO Steve Ballmer was so obsessed with shoring up Windows that he originally planned to delay the iPad version of Microsoft's hugely profitable Office software suite until the Windows tablet version was ready.

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The good news is this obsession with Windows profits seems to be over. Microsoft's new CEO Satya Nadella is someone willing to move away from pure software sales — at least in part — and toward online services. This is what he did as the head of the company's cloud and enterprise division. The division still sells software into massive data centers — and lots of it — but it has shifted much of its business onto Windows Azure, changing everything from the way it pulls in revenues to the way its sales staff operates. Now, he must try to strike a similar balance with client machines.

Presumably, in giving away its Windows desktop OS, Microsoft will push users not only toward Bing but also Office, Office365, and an online storage system known as OneDrive — just as Google gives away its Chrome OS operating system but charges businesses to use its Google Apps office suite and Google Drive storage system. One difference: Microsoft is still concerned with selling software applications that run directly on your computer as well as offering online services, whereas Google is completely committed to the cloud. But the more important issue may be that Microsoft must further shift the way it makes money. Google is used to driving revenues with free operating systems. Microsoft is not. But at least the company knows it needs to change.

Written by Ryan Tate at

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