Microsoft (NASDAQ:MSFT) recently unveiled plenty of surprises regarding the upcoming launch of Windows 10. After announcing that Windows 10 would unite phones, tablets, laptops, and desktops under a single OS, it declared that the new OS would be a free upgrade for most non-enterprise Windows customers, including those using pirated versions.
However, all those surprises were topped by a recent suggestion that Microsoft could turn Windows into a completely free, open-source OS to rival Linux, Chrome OS, and Android. At ChefCon 2015, Microsoft technical fellow and top engineer Mark Russinovich stated that it was "definitely possible" that Microsoft could "open-source" the entire Windows OS.
Would turning Windows into an open-source OS help Microsoft nullify Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) strategy of tethering users to free operating systems and cloud-based apps? Or would it completely wreck Microsoft's top- and bottom-line growth?
Why open-source Windows makes sense
Back in 2011, then-Microsoft CEO Steve Ballmer called Linux "a cancer that attaches itself in an intellectual property sense to everything it touches." In Ballmer's view, all software running within an open-source OS also had to be open-source. That statement doesn't make any sense today. For example, Android is an open-source OS, but plenty of apps, including Google's first-party ones, are closed source.
An open-source Windows would marginalize Linux distributions, the Linux-based Chrome OS, and other alternative operating systems for two simple reasons: the price tag and backward compatibility with older Windows software.
Microsoft is also targeting the Internet of Things market with free Windows 10 on the Raspberry Pi 2 and Qualcomm's (NASDAQ:QCOM) DragonBoard 410c. Making Windows open-source would make it easier to customize IoT devices for specific purposes. Security updates, powered by the community rather than Microsoft, could be more frequent, eliminating the need for bulky Service Packs.
Most importantly, Microsoft could use subscription-based apps, like Office 365, to generate revenue from its "free" operating system. This would tether more users to its ecosystem.
Why open-source Windows doesn't make sense
Unlike Ballmer, current Microsoft CEO Satya Nadella has embraced Linux.
Last October, Microsoft expanded its Azure cloud service to Linux users. The following month, Microsoft open-sourced its .NET framework, which is used to develop website and large online applications, to Linux and Mac developers. Microsoft also launched mobile versions of its Office apps on iOS and Android. These were all smart moves that expanded Microsoft's software and services beyond its own operating systems.
However, turning Windows into an open-source OS could cause big problems. The first problem is that ecosystem and subscription revenues couldn't offset billions in lost Windows license revenues. Bing, Microsoft's search and ad ecosystem, generated just $1.1 billion in revenue in fiscal 2014 -- compared to $86.8 billion in total revenues that year.
Meanwhile, making Windows open-source exposes it to major modifications which could cause Microsoft to lose control of its own OS. For example, Amazon (NASDAQ:AMZN), previously stripped Google's services (and ability to monetize the OS) from Android to create Fire OS. If that happens to Windows, Microsoft could have no way to monetize those variants. Those "forked" versions of Windows would further fragment the Windows PC market, which Microsoft is trying to unite with Windows 10.
Microsoft won't jump the shark yet
Microsoft might look like it's turned over a new leaf with its free upgrade offer for Windows 10, but I think it's unlikely to commit financial suicide to wipe out Linux/Chrome's 3% share of the PC market.
Moreover, investors should remember that the Windows 10 upgrade offer will expire after a year. It's unclear if a subscription plan will follow, but Microsoft must have something up its sleeve for monetization purposes. And as much as Nadella declares that he loves Linux, Windows 10 also gives OEMs the option to prevent the installation of alternative operating systems by locking the bootloader.
In my opinion, Microsoft's recent strategies are about expanding its control over the PC market, not a true concession toward open-source operating systems. A top Microsoft exec might have suggested that it would be "possible," but investors should take that claim with a grain of salt.