Microsoft (NASDAQ:MSFT) executive Jerry Nixon recently stated at the company's Ignite Conference that Windows 10 would be the "last version" of its flagship operating system.
Of course, this doesn't mean that Windows will disappear. It means that Microsoft will abandon its old strategy of launching new Windows OS upgrades every few years, and launch a version of Windows which is updated "incrementally" over the cloud instead. This represents a significant shift in Microsoft's business strategy, so let's discuss what the "last version" of Windows actually means for consumers and investors.
Microsoft's Windows strategy
Windows has traditionally been one of Microsoft's cash cows. But over time, customers started sticking with versions of Windows that were simply "good enough" for everyday use. This fragmented the Windows market and forced Microsoft to waste resources on supporting outdated operating systems. Microsoft's newest OS features also won't work with many of these older systems.
According to Net Market Share, Windows 7 is still the most popular PC operating system in the world, with a 58% share of the market. Windows XP comes in second at 16%, followed by Windows 8/8.1 at 15%. To get more users back on the same page, Microsoft will launch Windows 10 as a year-long free upgrade for non-enterprise Windows 7, Windows 8, and Windows Phone users this summer.
Microsoft plans to make Windows a single OS for smartphones, tablets, PCs, and Internet of Things devices. This could let it leverage its 90%+ market share in PCs to grow its smartphone market share, which stood at less than 3% at the end of 2014.
Plenty of new features
After uniting all these users and platforms under a single OS, Microsoft will launch new features that dramatically modify the Windows experience.
First, it will merge the desktop and Metro interfaces with a new Start Menu button and Windowed Metro apps. Cortana will be integrated with the OS and synchronize data between different devices and deliver notifications to the desktop. Gamers will also be able to stream Xbox One games to Windows 10 devices.
But the most impressive feature is Continuum, which lets Windows 10 devices use a single device for mobile, tablet, and desktop interfaces. For example, a Windows 10 Phone can be converted into a full-sized desktop after being plugged into a larger screen. In the near future, consumers might only need a single all-in-one mobile device instead of a phone, tablet, notebook, and desktop.
Ideally, all those users would be tethered to Microsoft's cloud-based productivity apps like Office 365 and OneDrive, while user data would be synced to Azure, its growing cloud computing platform.
But sacrifices must be made
That's an incredible vision for the future, but bottom line sacrifices must be made. To help its hardware partners launch cheaper tablets and laptops, Microsoft reduced and even eliminated Windows license fees for certain devices. To convince users to use Office 365 and OneDrive instead of Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Drive, it bundled free trial memberships with cheaper laptops and tablets.
As a result, Microsoft's Windows OEM Pro and non-Pro revenue respectively declined 19% and 26% year-over-year last quarter, and companywide net income slipped 12%. That pressure will likely continue as Microsoft offers free upgrades to Windows 10. Analysts polled by Thomson Reuters expect Microsoft's earnings to fall 8% annually in fiscal 2015.
Unanswered questions about the future
That pressure means that it's impractical to offer Windows for free forever. Therefore, two things could happen after Windows 10 is released.
First, Microsoft could introduce subscription plans for Windows 10 after the first year of "free" upgrades passes. This would stabilize Windows revenue and make it easier to forecast future growth based on subscriber numbers. However, consumers could consider that move to be a big bait and switch, and the backlash could be intense.
Second, Microsoft could use Windows 10 as a loss leader. This means that the base version of Windows 10 will remain free, but could generate more app sales from the "universal" Windows Store, which features cross-platform apps for phones, PCs, and Xbox consoles.
Last year, Apple's (NASDAQ:AAPL) iTunes App Store generated about as much revenue as Microsoft's entire consumer Windows division, so Microsoft might eventually offset lost Windows revenue with its 20%-30% cut of app sales from a growing app store.
The key takeaway
Microsoft's Windows 10 strategy could evolve Windows and prevent Google from expanding into PCs via Chromebooks and hybrid Android devices. It finally ditches an aging and ineffective strategy of hit-or-miss upgrades, and addresses the needs of cloud-connected consumers. If this strategy succeeds, Windows 10 could indeed be the "last" Microsoft OS that users will need to manually install.