Microsoft (NASDAQ:MSFT) just announced that it will skip over Windows 9 and jump straight to Windows 10. The new OS, which was recently unveiled in San Francisco, will replace the Metro UI with "Live Tiles" which will integrate into a new Start Menu. The new OS will share a similar code base across PCs, tablets, and smartphones, helping Microsoft take a big step toward realizing its vision of "One Windows" when it arrives in fall 2015.
But here's the twist: Windows 10 might be a free upgrade for Windows 8 users when it launches, according to Indonesian news site Detik.com. Before the Windows 10 announcement, the site published a statement from Microsoft Indonesia President Andreas Diantoro, who stated that Windows 8.1 will "update automatically" to the company's latest OS. This partially confirms previous rumors hinting that Microsoft would launch Windows 10 as a free update for Windows XP and Windows 8 users. Nothing has been said about Windows Vista or Windows 7 users yet, although new rumors suggest that Microsoft could charge $30 for a Windows 7-to-Windows 10 upgrade.
If Microsoft gives away Windows 10, it would represent a radical departure from its traditional business of selling operating systems, supporting them, and then replacing them with brand-new versions every few years. Let's look at why that could be a brilliant long-term move.
One system to rule them all
According to Net Market Share, the Windows ecosystem is severely fragmented. Fifty-one percent of PC users still use Windows 7, 24% use Windows XP, 3% use Windows Vista, and about 13% use Windows 8 and 8.1.
The reason so many users stick with Windows XP and Windows 7 is the lingering notion that the two operating systems are simply "good enough" for everyday use and compatible with most third-party software. Microsoft exacerbated the problem with the polarizing Metro UI for Windows 8, which alienated longtime Windows users while falling short of being a tablet-based OS.
To wean users off older versions of Windows, Microsoft discontinued support for Windows XP in April and will stop selling copies of Windows 7 to PC manufacturers on Oct. 31 However, progress has been painfully slow, and some countries, like China, have protested the forced upgrade from Windows XP.
If these users all refuse to upgrade their systems, Microsoft's dream of a single Windows OS will never come true. However, offering Windows 10 as a free or cheap upgrade to XP and Windows 8 users could give the new OS a 37% share of the PC market. Extending that offer to Windows 7 and Vista users could potentially unite 91% of the PC market under a single OS. Computerworld estimates that free upgrades from 8.1 to 10 could push half the installed base of PC users to the latest OS by the end of 2015.
With that unified foundation in place, Microsoft could phase out RT and increase support for x86-based phones -- like Asus' ZenPhone and Lenovo's K900 -- so it can eventually replace the ARM Holdings-based Windows Phone with a scaled-down version of Windows 10.
A one-time offer... with strings attached
Microsoft has strongly hinted that it doesn't mind offering Windows for free.
In April, the company eliminated its license fee for phones and tablets with screens under 9 inches -- demonstrating that it was willing to sacrifice revenue to gain market share against Apple and Android devices. In May, it launched Windows 8.1 with Bing, a cheaper version of Windows that set Bing as the default search engine in Internet Explorer. Microsoft only offered this version to select hardware manufacturers to develop low-cost laptops to counter the rise of Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Chromebooks.
However, that doesn't mean Microsoft plans to convert Windows into a completely free OS like Android. Windows licenses still generate lots of money -- last year, Microsoft reported $16.86 billion in Windows revenue, which accounted for nearly a fifth of the company's top line.
Therefore, offering Windows 10 as a free or cheap upgrade will probably be a one-time offer that could lead into a subscription-based version of Windows. If Microsoft turns Windows into a subscription-based service, it won't have to worry about users who refuse to upgrade, the segment's revenue growth will be easier to predict based on subscriber numbers, and it will have a strong platform to promote key services such as OneDrive, Office 365, and Bing/MSN.
A Foolish final thought
If this is Microsoft's true plan -- to overwrite all its previous systems with a free OS and then eventually turn it into a subscription-based one -- it could finally help the company break its cycle of endless upgrades and diminishing returns.
Google will still definitely have the advantage in pricing, since both Android and Chrome OS are free, but at least Microsoft will be able to fight back from a unified front backed by most of the world's PC market.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Google (A and C shares) and owns shares of Google (A and C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.