Microsoft is giving away Windows 10, the latest version of the operating system, for free to existing users until July — and some people say that should continue after the deadline.
Microsoft’s business model has traditionally been made up of several components: selling services to enterprise, hardware (like Surface and Xbox), licensing Windows to PC makers, and licensing Windows to everyday customers.
Giving away Windows 10 for free to consumers essentially kills the last source of revenue, which accounted for around $4 billion (£2.7 billion) in 2015.
However, as Ed Bott of ZDNet points out, Microsoft can afford to give away Windows 10 for free to consumers as it only makes a smaller amount of money from it per year compared to its other revenue sources.
Microsoft made over $40 billion (£27 billion) from licensing its services to enterprise customers in 2015, a little under $20 billion (£13 billion) from its cloud business, $17 billion (£12 billion) from hardware, and a little over $10 billion (£6.9 billion) from licensing Windows to PC makers.
Licensing Windows to consumers, then, accounts for a tiny proportion of the company’s overall revenue.
To understand why Microsoft is giving away Windows 10 for free, it’s important to understand the company’s goal for the operating system: One billion users.
The one billion user figure requires a broad range of devices to run Windows 10, not just PCs, and this means making it as attractive to everyone as possible. The overall PC market is in decline, which doesn’t help Microsoft’s cause.
Microsoft has, over the past few years, steadily been lowering the price of Windows, but the drop to free is new with Windows 10 and signals a shift within the company.
The company has, according to ZDNet, one of three options when it comes to July this year and a decision has to be made:
- Go back to the original model of charging users a licence to get Windows.
- Extend the period of time Windows 10 is free.
- Change out the free offer for a different offer.
However, these three options, according to Paul Thurrott, a well-respected Microsoft blogger, need to be swapped out for a new, and much more radical, one: Windows 10 should always be free.
“[A]s long as the version of Windows you’re currently using is supported, you should get the upgrade to Windows 10 for free,” Thurrott writes. “Microsoft should never, ever stop offering the Windows 10 upgrade for free. Doing so is the only way to ensure that Windows successfully evolves into a mobile/cloud-like always-evergreen system.”
Thurrott makes it clear that his take is just speculation, but it seems clear that Microsoft should keep Windows 10 free for a long period of time if it (a) wants to make its own one billion goal and (b) wants to get a foothold in the future of computing, which likely requires the most users on all platforms.
“Microsoft’s cloud-first business model provides lots of opportunities for them to sell software as a subscription,” writes Bott, referring to Office, Azure, and Microsoft’s other enterprise software. “But Windows 10 isn’t going to be on that list.”
In other words, Windows 10 should stay as a free upgrade forever.
But, Microsoft can still make money from Windows.
One of the other reasons, beyond pure volume of users, Microsoft could want one billion people on Windows 10 is because making money out of one billion people is easy.
Apple has sold one billion iOS devices, according to the company, and these are equivalent to around $31 billion (£21.5 billion) in revenue every year, mainly through the iTunes and App Stores. Not all of this revenue goes to Apple specifically, but it’s still a big market.
Microsoft has been expanding its Windows Store, where it offers apps, games, music, and video content. According to ZDNet, Microsoft made around $5.5 billion (£3.8 billion) from gaming (and other Windows Store revenue) in the six months leading up to January.
This figure is roughly the same amount as the company made from licensing Windows to consumers — and Windows 10 only has 200 million users.
The potential for growth, which is likely linked to the number of Windows 10 users, means that it’s in Microsoft’s interests to get as many people as possible on-board.
Microsoft can, and does, make money elsewhere.
As the chart above shows, Microsoft makes a lot of money from things that are not Windows licenses.
Steve Ballmer, the CEO of Microsoft from 2000 to 2014, told Business Insider that “the work Microsoft’s doing with Surface, with HoloLens, with Xbox [is] absolutely essential to the company’s future.”
Microsoft made $1.4 billion (£970 million) from Surface in the three months leading up to January, an increase of 29% year-over-year in constant currency (which does not account for macroeconomic trends like currency fluctuations). The number is still small compared to Office or the cloud (which brought in a combined $12 billion), but its growing.
The Surface brand is becoming established and Microsoft is rolling out its products to more markets, such as the UK, which will only increase sales.
Microsoft’s apps on other devices, namely iOS and Android, are also seeing success. According to Microsoft, Office has had over 340 million downloads on the platforms while Skype now has 900 million users.
So, how does AI fit in?
Microsoft has been making lots of noise about artificial intelligence and machine learning recently, building funky apps for the iPhone and Android, putting it at the top of its list of predictions for 2016, and talking about Xiaoice, the project in China that has been compared to the Turing test.
The company has been building AI into a lot of its core products, most noticeably with Cortana, the virtual assistant that ships in Windows 10.
Office has also been given a dose of AI, with features like Delve, built into the 2016 version, surfacing useful information from an inbox automatically.
These features aren’t going to sell copies of Windows (or, under the new model, downloads) on their own, but they do present Microsoft as an exciting company at the forefront of innovation.
“Microsoft is a pretty serious business with clearly a lot going on in the AI and machine learning space,” said Azeem Azhar, an AI expert, in an email to Business Insider last month.
Continue as you are — or not.
The path ahead for Windows is still unclear, and Microsoft may well choose to charge users for the upgrade. But, according to Thurrott, the company may be considering a new strategy.
“Microsoft gets that the world has moved,” he writes. “They have evolved Windows into an always-updated modern monstrosity, and Windows 10 is now updated as if it were a simpler mobile OS or a cloud service. Yes, there are some fits and stops along the way, but this first year is all about making that transition.”
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