Next week, when Microsoft
releases Windows 10, the latest version of the company’s operating
system, the software will offer a mix of the familiar and new to the
people who run earlier versions of it on more than 1.5 billion computers
and other devices.
There will be a virtual assistant in the software that keeps track of users’ schedules, and Microsoft
will regularly trickle out updates with new features to its users over
the Internet. And the Start menu, a fixture of Windows for decades, will
make a formal reappearance.
But
one of the biggest changes is the price. Microsoft will not charge
customers to upgrade Windows on computers, a shift that shows how power
dynamics in the tech industry have changed.
The
decision to make free a product that once cost $50 to $100 is a sign of
how charging consumers for software is going the way of the flip phone.
Companies like Google have crept into Microsoft’s business with free
software and services subsidized by its huge advertising business, while
Apple in recent years has made upgrades to its applications and
operating systems free, earning its money instead from hardware sales.
Microsoft,
whose core business is software, sought to buck this trend for as long
as it could. But the inroads made by companies like Apple and Google
have put intense pressure on Microsoft to find new ways to profit from
some of its big moneymakers.
“It
will confirm people’s expectations that you don’t pay for operating
systems,” Jan Dawson, an analyst at Jackdaw Research, said of Windows
10. He added, referring to Microsoft’s devices: “They’re basically
killing off their ability to monetize anything on the consumer side,
aside from Xbox, Lumia phones and Surface.”
Already,
the company has been giving away mobile versions of Office apps like
Word and Excel, an effort to give the software some life in a category
of devices where the company is weak. And it has made Windows free to
companies that make smaller devices, mainly smartphones and tablets, to
get more of them to use the software.
The
thinking behind the Windows decision follows a similar logic. Microsoft
decided to sacrifice some of its Windows revenue for the simple reason
that the company needs people using Windows 10 — and fast. PCs have lost
momentum in many ways to smartphones and tablets in recent years. The
company’s last operating system, Windows 8, did not revive the market
and might have made matters worse with a bold redesign of its interface
that turned off some users.
During
the second quarter, global PC shipments declined 9.5 percent, according
to Gartner, the technology research firm. Gartner estimates that there
will be about 300 million PCs sold this year and 1.9 billion mobile
phones. Windows ships on less than 3 percent of the smartphones sold
globally, with Google’s Android and Apple’s iOS accounting for most of
the rest.
“Consumer
Windows is fighting for relevance in a world where Apple and Android
are the dominant OSes,” said Bill Whyman, an analyst at Evercore ISI.
“That’s the challenge.”
An
operating system is only as good as the programs that can run on top of
it. But in recent years, Windows has become an afterthought for many
software developers, who have turned to the huge and engaged audience on
smartphones. That shift has left Microsoft in a precarious position
with consumers in recent years.
To
generate more interest from developers, Microsoft has designed Windows
10 to run on PCs, smartphones and other devices, which is meant to make
it easier for developers to write apps that run across all of them. And
the company has sworn there will be one billion devices running the
software in the next two to three years, giving developers a huge
potential market to reach with their creations.
“I
think we will see really huge adoption” of Windows 10, said Kevin
Sather, director of product marketing for systems at Razer, a maker of
high-end gaming computers and other devices.
The
benefits of fast and free adoption of Windows 10 could well outweigh
the revenue Microsoft is giving up. The company does not disclose how
much upgrade revenue it normally makes from a new operating system, but
analysts estimate that it is small compared with the other ways the
company makes money from the operating system.
Amy
Hood, Microsoft’s chief financial officer, recently told investors that
the company expected to make about $15 billion in revenue from Windows
during its last fiscal year, which ended June 30.
Most
of that revenue was related to the corporate market, where Microsoft’s
position is stronger than it is among consumers. About a quarter of
Windows revenue was from volume licensing deals with big business
customers, who typically pay for rights for Windows upgrades over
several years, along with the ability to manage a multitude of users
over corporate networks.
Most
people pay for Windows, whether they realize it or not, when they buy a
new PC with a copy already installed. Nearly half of Windows revenue
came from PC makers who licensed the operating system to put on machines
aimed at the professional market, while a little over a quarter, about
$4 billion, was from consumer PC makers.
“The
piece they’re giving away is the piece nobody is buying anyway, which
is the upgrade to Windows,” said Steve Kleynhans, an analyst at Gartner.
Windows
remains the dominant operating system on PCs, and unless that starts to
change, Microsoft is unlikely to stop charging computer makers for the
software. Still, competitors are biting Microsoft’s ankles in the
consumer market, forcing the company to cut prices in some areas. Last
year, Microsoft cut fees for the operating system for manufacturers in
the low end of the laptop market, where Windows faces growing
competition from inexpensive devices known as Chromebooks, which run a
free Google operating system.
The
company’s chief executive, Satya Nadella, also made Windows free on
devices with screens smaller than nine inches, a category that consists
mainly of smartphones and tablets, along with some laptop-like products.
Microsoft
executives have started talking up new ways to make money from Windows.
Executives see advertising revenue from Bing, the company’s Internet
search engine, which is enmeshed in various functions within Windows, as
one avenue. In addition, if the company can get enough people to buy
games and other software through the Windows app store, its cut from
those transactions could become meaningful.
The
company is pursuing such trade-offs in other areas. With Office, for
example, Microsoft gives away mobile versions to get people to pay for a
subscription to the product, which gives them the ability to use the
software on PCs in addition to online storage and other benefits.
Microsoft is also seeking to participate in the hardware side of the
technology business, with its Surface tablet computers and Lumia
smartphones, though it recently announced plans to scale back the
smartphone business after weak sales.
The
company also has a broad array of software products aimed at the
corporate market, including databases, messaging and cloud computing
services, that are doing well and could help offset a loss in revenue
from the free upgrades.
But
John DiFucci, an analyst at Jefferies, said Microsoft’s grip on the
business market may be less solid than generally assumed. He said he had
noticed in meetings with investors that more and more bring iPads,
Android tablets and Chromebooks to take notes.
“There’s some risk there I think people are ignoring, or at least not appreciating,” he said.