Microsoft's (NASDAQ:MSFT) Windows 10 got off to a strong start following its launch on July 29, with the OS downloaded over 14 million times within the first 24 hours.
However, privacy advocates quickly noticed some significant changes in how Microsoft tracks its users. Most settings in Windows -- including browser history, favorites, and passwords -- are now automatically synchronized to Microsoft's servers. Cortana collects even more data for Microsoft, including a device's location, calendar data, app usage, emails, text messages, and phone call history. Each Windows 10 device is also branded with a unique advertising ID to let ad networks profile users.
The inevitable death of privacy
Privacy issues probably won't impact the mainstream adoption rate of Windows 10 for two simple reasons. First, it's being offered as a free upgrade for many Windows users. Second, virtual privacy has been fading away ever since Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) took over the Internet.
At an FTC conference In 2013, Google's VP and Chief Internet Evangelist Vinton Cerf admitted that "privacy may be an anomaly" in the near future. Back in 2010, Facebook CEO Mark Zuckerberg told TechCrunch that privacy was no longer a "social norm", since people were more comfortable with sharing information "openly and with more people". Both Google and Facebook obviously benefit from the death of virtual privacy, since they make money by mining user data for targeted ads.
Apple CEO Tim Cook recently slammed Google, Facebook, and other web-based companies for "gobbling up everything they can learn about you and trying to monetize it" with ads. Cook warned that those companies were "lulling their customers into complacency about their personal information."
Where does Microsoft stand?
Despite Cook's warnings, mainstream customers often care about price tags more than digital privacy. That's how Google's Docs/Drive, Android, and Chrome OS disrupted Microsoft's core business of productivity software and operating systems.
Google could afford to give away its software for free, because it wanted to gather more data from users and expand its advertising ecosystem. Microsoft, which relied on selling software licenses, couldn't generate enough revenue from its ad business to counter Google's attack with free software of its own.
But under CEO Satya Nadella, Microsoft's game plan changed. Instead of letting Google chip away at PCs with Chrome and dominate mobile devices with Android, it released a free Windows 10 update across mobile devices, PCs, and even Xbox One consoles. By pulling all those devices into a "One Windows" ecosystem with a shared universal apps store, Microsoft tightened up its defenses against Google. To temporarily counter Google's free cloud-based services, Microsoft started bundling free trials to OneDrive and Office 365 with new Windows hardware.
Microsoft isn't Google
To build a proper "One Windows" ecosystem with devices connected to each other and the cloud, Microsoft needs to synchronize data across all Windows 10 devices. That's why it needs to gather so much information from each user.
Unlike Google, Microsoft probably won't use most of that data for ads. Research firm eMarketer expects Microsoft's online ad revenues to rise 18.5% annually this year to $3.45 billion. That's down from 48.7% growth in 2013 and 33.3% growth in 2014, and would represent less than 4% of Microsoft's projected annual revenues for 2015. Microsoft also recently handed over its display ad business to Verizon's AOL, which should accelerate that decline.
Microsoft might sell some Windows user data to advertisers, but it mainly lowered privacy settings to create a seamless Windows 10 ecosystem tethered to cloud services like Office 365. That's where the real opportunity lies -- Microsoft expects its annual cloud revenue to rise from around $8 billion today to $20 billion by 2018.
The key takeaways
Privacy advocates have been around ever since people first went online. Yet they honestly haven't had much impact against companies like Google and Facebook, and it's unlikely that they'll dampen the appeal of Microsoft's Windows 10.
Investors should realize that Microsoft's main goal isn't to sell user data to advertisers. Instead, it's to connect user data across multiple devices in a "One Windows" ecosystem, which can support the growth of cloud-based services like Office 365, Dynamics CRM, and Azure.