Microsoft (MSFT -0.05%) recently announced the official prices for Windows 10, which is scheduled to launch on July 29. Let's see what these different prices and upgrade paths reveal about Microsoft's strategies for its newest operating system.

Source: Microsoft

Free upgrades for Windows 7 and Windows 8 users
As Microsoft announced earlier, upgrades from Windows 7 and Windows 8/8.1 will be free for the first year, and updates will continue for the lifetime of the device. Windows 7 Starter, Home Basic, Home Premium, and Windows 8/8.1 users can upgrade to Windows 10 Home. Windows 7 Professional, Ultimate, and Windows 8.1 Pro users can upgrade to Windows 10 Pro.

Microsoft is doing this to reduce fragmentation among Windows devices. According to Net Market Share, 58% of PC users worldwide use Windows 7, 15% use Windows XP, while only 16.5% use Windows 8/8.1.

If Microsoft launches Windows 10 into this market as a paid upgrade, many users who feel that their existing OS is "good enough" likely won't pay up. This means that new features for Windows 10 -- a scalable "universal" OS between mobile devices and PCs, cross-device synchronization of data, notifications, Cortana, and more -- won't mean much for most PC users.

Therefore, Microsoft is willing to upgrade Windows 7 and Windows 8 PCs to Windows 10 for free to quickly get a large percentage of the PC market onto the same page. Once there, Microsoft can monetize them with cloud-based productivity tools like OneDrive and Office 365, or app sales from the Windows Store. It might seem odd to expect app store sales to offset some lost upgrade revenues, but consider this: Apple's (AAPL -0.69%) iTunes App Store generated roughly as much revenue as Microsoft's entire consumer Windows division last year.

Windows Store. Source: Microsoft

Enterprise users have two upgrade paths
Enterprise users on both Windows 7 and Windows 8 won't get a free upgrade to Windows 10, because they are already on other licensing plans. However, Microsoft will send these users down two licensing paths: Long Term Servicing (LTS) and Current Branch for Business (CBB).

The LTS path includes security and critical updates only, and won't install new features designed for mainstream consumers for the duration of mainstream (five years) and (five years) extended support. LTS is designed for "mission critical" systems in emergency rooms, air traffic control towers, financial trading systems, factory floors and other places which can't be altered over long periods of time.

The CBB path will receive the same security and critical updates, but will also get select consumer-facing updates after their quality and application compatibility have been "assessed" in the mainstream market. Microsoft is expected to bundle per-user licenses of Windows 10 in the Enterprise Cloud Suite (ECS), which includes Office 365 Enterprise E3 and the Enterprise Mobility Suite, which is used to manage employee devices. The entire bundle will cost between $7 to $12 per user per month.

Other users still have to pay
Users who are building a new PC or own an older operating system than Windows 7 can't upgrade their systems for free. They'll need to purchase either the Home version for $119 or the Pro version for $199. Upgrading from the Home to Pro version will cost $99.

Source: Microsoft

This highlights an often overlooked fact about Microsoft's "free upgrade" plan: many mainstream consumers don't actually buy Windows upgrades. Instead, they buy new PCs with Windows preinstalled. After a few years, they'll replace those PCs with new models which have newer version of Windows preinstalled. In that market, OEMs are paying Microsoft for Windows licenses.

Meanwhile, fewer consumers are still building their own computers, since it's generally more cost effective to buy PCs from manufacturers which get bulk discounts on parts. That's why Intel (INTC -0.78%) exited the motherboard business in 2013. With most consumers buying new PCs instead of licenses for new computers, Microsoft doesn't actually forfeit that much revenue by offering free upgrades to Windows 10.

The road ahead
When Microsoft announced that it would offer Windows 10 as a free upgrade, many pundits predicted that Microsoft could make Windows entirely free or even open source like Android. Those suggestions were silly, because Microsoft certainly wasn't going to kill its cash cow just to be more like Google (GOOG -2.00%) (GOOGL -2.15%).

Instead, all Microsoft is really doing is dangling a carrot in front of Windows 7 and 8 users to get them to upgrade to Windows 10 as quickly as possible. With an over-the-air update, Microsoft can upgrade Windows Phones as well and finally start building its "One Windows" ecosystem.