Please ensure Javascript is enabled for purposes of website accessibility

How Will Microsoft's Free Windows 10 Strategy Help It Compete Against Apple and Google?

By Andrew Tonner - Sep 16, 2015 at 7:03AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Is killing one of Microsoft's traditional profit centers really worth it?

With the rise of Apple's (AAPL 0.17%) and Google's (GOOG -1.29%) (GOOGL -1.34%) dominant smartphone ecosystems, it's easy to dismiss PC software colossus Microsoft (MSFT -0.23%) as being on the losing side of history.

Source: Benedict Evans of Andreessen Horowitz

As you can see, there's clearly some truth to this perspective. However, it's probably more accurate to characterize Microsoft as down, but not out, versus dismissing it altogether at this stage of the mobile revolution.

However, in order to remain relevant, Microsoft must see its recently launched Windows 10 software update succeed. Thankfully, some recent data indicate robust adoption of Microsoft's next-gen software system.

Windows 10 downloads trending toward 100 million 
Late last month, Microsoft Windows marketing chief Yusuf Mehdi published a series of tweets touting the torrent pace of adoption of Windows 10. Among them, most importantly, Windows 10 had achieved an impressive 75 million installations as of Aug. 26.

This number appears to have exceeded many analysts' estimates of Windows 10 uptake through August. For instance, FBR Capital Markets analyst Daniel Ives estimated Microsoft might achieve closer to 50 million by the end of August.

At that current pace, Microsoft Windows 10 would have reached 100 million installs by around Sept. 5 -- assuming constant adoption -- a number often discussed as a key indicator that Microsoft's free download strategy for Windows 10 has indeed resonated with consumers on the company's long-term road map to port 1 billion users onto its most recent software package during the next three years.

However, some Microsoft shareholders also worry that driving early adoption of Windows 10 by giving away free downloads could kill one of Microsoft's two financial golden geese. This also deserves consideration here.

Finding value in free downloads
Without question, making Windows 10 installs free to Windows 7, Windows 8.1, and Windows Phone 8.1 users within the first year played a crucial role in spurring such rapid adoption. However, this dramatic shift from past Windows monetization strategies has understandably caused concern among some Microsoft shareholders. However, it deserves mentioning that Microsoft plans on making plenty of money from Windows 10 in the months ahead in a few important ways.

For starters, users qualifying for free Windows upgrades account for about 80% of the estimated 1.5 billion Windows users worldwide. The remaining 20% of legacy systems, or any fresh computer, tablet, or Windows Phone sales driven by the new OS, will generate revenue for Microsoft.

Additionally, new features like the ability to stream Xbox One games onto any Window 10 tablet or computer will clearly drive secondary revenue streams like new Xbox One sales. This carries the additional benefit of helping further position Microsoft in the emerging growth market that is the smart home, as well.

It's also worth noting that part of Microsoft's free download strategy aims at pleasing another critical cohort -- developers. By porting as many Windows users as possible to its most current OS, Microsoft hopes to create a highly conducive environment for developers, especially on mobile, where Microsoft has long struggled to steal attention away from Google's and Apple's development ecosystems.

Microsoft shares app-download revenue under the same 30/70 split that Google and Apple use, so enticing greater developer participation will clearly drive some incremental revenue, as well. However, the benefit of a healthy developer ecosystem far outweighs the revenue stream that comes with it.

Microsoft has said repeatedly in recent years that it sees itself as a devices and services company in the post-PC era. The implication is that it realizes it will need to possibly leverage, and in some cases sacrifice, some of its traditional profit centers in order to successfully compete against its mobile adversaries. That's the unfortunate cost of staying relevant.

However, with the total number of devices in operation also exploding, Microsoft still faces a number of interesting growth opportunities for its budding suite of services in the years to come.This makes the Windows 10 free download strategy a gamble worth taking.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Microsoft Corporation Stock Quote
Microsoft Corporation
$252.56 (-0.23%) $0.58
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,178.16 (-1.34%) $-29.52
Apple Inc. Stock Quote
Apple Inc.
$137.59 (0.17%) $0.24
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,186.26 (-1.29%) $-28.65

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/22/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.