Microsoft (NASDAQ:MSFT) recently announced that all next-gen CPUs built by Intel (NASDAQ:INTC), AMD (NASDAQ:AMD), and Qualcomm (NASDAQ:QCOM) will only support Windows 10 instead of older versions of Windows. These CPUs include Intel's Kaby Lake, AMD's Bristol Ridge, and Qualcomm's Snapdragon 820 processors.
Microsoft also plans to remove Windows 7 and Windows 8.1 support for Intel's new Skylake processors, but will still support "a list of specific new Skylake devices" until July 17, 2017. This doesn't mean that Microsoft will drop support for older CPUs -- support for Windows 7 on older chips will last through Jan. 2020, and support for Windows 8 won't cease until Jan. 2023.
"As new silicon generations are introduced, they will require the latest Windows platform at that time for support," said Terry Myerson, Windows and Devices chief. He also stated that leaving older versions of Windows behind would enable Microsoft "to focus on deep integration between Windows and the silicon."
Why is Microsoft doing this?
Consumers hoping to install an older version of Windows on their new PCs will likely be disappointed by Microsoft's announcement. But Microsoft's decision makes sense. According to Net Market Share, nearly 90% of PCs worldwide run Windows, but only 10% run Windows 10. Fifty-six percent still run Windows 7, 13% run Windows 8/8.1, while 11% run Windows XP.
This fragmentation limits Microsoft's ability to unify its ecosystem with new features like Cortana and universal apps. It also forces the company to waste time and resources on supporting older operating systems with security updates. Microsoft only stopped supporting Windows XP in April 2014, nearly 13 years after its initial release. To get more of these users on the same page, Microsoft offered Windows 10 as a free upgrade for most Windows 7 and Windows 8.1 devices.
By limiting next-gen CPUs to Windows 10, Microsoft can make a clean break with older hardware, and ensure that fragmentation fades as older hardware dies out. This strategy will also enable Microsoft to develop new features optimized for new CPUs.
Kirk Skaugen, general manager of Intel's Client Computing Group, told The Verge that the chipmaker collaborated with Microsoft throughout the development of Skylake to create "the most secure software and processor combination ever" through software guard extensions. Windows 10 can also access Intel's depth-sensing RealSense cameras for biometric scanning, and tap into new sensor hubs and image signal processors in Intel's newer mobile processors. Windows 10 Mobile's Continuum feature, which turns phones into desktops, only runs on Qualcomm's newer mobile chips.
The evergreen release cycle
Skaugen also noted that the "evergreen release cycle of Android and iOS" helps Intel "light up" new hardware features much faster. This means that, instead of waiting several years for Microsoft to release a major new OS to unlock new functions in their processors, chipmakers can now move in sync with Microsoft's automatic incremental upgrades.
Microsoft CEO Satya Nadella recognized that the old model of periodic OS upgrades was becoming obsolete, and that the company's Windows and Office cash cows had to evolve into cloud-based services. By turning those products into evergreen services, Microsoft can lock in users, and charge more-stable recurring subscription fees. That's why Microsoft's Jerry Nixon called Windows 10 Microsoft's "last version of Windows" last May.
Microsoft has already transitioned Office to a subscription-based model with Office 365, and sells Windows subscriptions to businesses. However, it's doubtful that it will do the same with the consumer version of Windows 10. Instead, Microsoft will likely use that version as a free launchpad for paid apps and services like Office 365 and OneDrive.
Moving toward the cloud
The Wall Street Journal estimates that consumer Windows sales usually only generate one-quarter to one-third of overall Windows revenues, which translates to less than 5% of Microsoft's top line. Therefore, Microsoft might be willing to sacrifice those sales to boost its cloud-based revenue with Office 365, Dynamics CRM, and Azure.
Last April, Nadella declared that Microsoft will generate $20 billion in cloud revenues by fiscal 2018. To reach that target from its current run rate of $8.2 billion, Microsoft needs to first drop the dead weight of Windows XP, 7, and 8.1, and get its users on the same page. Leaving old hardware behind can help it accomplish that goal.
Leo Sun owns shares of Qualcomm. The Motley Fool owns shares of and recommends Qualcomm. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.