Windows in the Mobile First, Cloud First Era

While Microsoft has always rejected the quasi-religious message behind the free software movement, the company is inherently pragmatic. With the personal computing market moving quickly to highly portable mobile devices running other platforms, Microsoft has little choice but to follow suit and make Windows free on such devices. Will this strategy work?

Like many of you, I was young and idealistic once. Years ago in a computer lab in Scottsdale Community College I was presented with something that would change my life forever, though in an indirect way: Linux, which wasn't just free software, but an entire free operating system that could be—with some difficulty, at the time—melded to look and work the way you wanted.

I've told this story many times, so skip ahead a paragraph if you've heard it before. But I wondered how Microsoft, then rising to its plateau of power and influence, could possibly fight free solutions like Linux. What if, I conjectured, someone wrote a free office productivity suite that provided the top 10 percent of functionality in Microsoft Office?

Microsoft's responses to free software over the years have been interesting. From Bill Gate's tortured letter to the computer enthusiasts who were stealing his company's code in the 1980s to Steve Ballmer's declaration that Linux was "a cancer," the firm's leaders have clearly struggled with this issue. But from a purely competitive standpoint, Microsoft has done pretty well over the years, aside from a few sad episodes like Visual J++, its bald-faced attempt at destroying Java by pretending to embrace it.

Linux and open source office productivity suites never did seriously challenge Windows and Office on the PC, although it's fair to mention that both still exist today and are quite mature. The last hurrah came about 8 years ago, when the netbook phenomenon arrived at an unfortunate time for Microsoft: The release of Windows Vista, an OS that was top-heavy and resource intensive, and unsuitable for the cheap and low-end computers that PC makers and users temporarily embraced.

Microsoft's response was Windows XP Starter Edition, which was tailored for PCs with lower hardware specifications, i.e. netbooks. Originally targeted at emerging markets, Starter Edition killed off Linux for good on the PC desktop. Game over, right?

Not quite. Flash forward a few years and everything is changing again. As admitted in the slogan "mobile first, cloud first," the industry has rallied around high mobile and connected devices, a natural enough evolution. There's just one problem from Microsoft's perspective: The devices most people are using, primarily Android-based but also many iOS devices, are not built on Microsoft platforms.

Taking a page from its netbook playbook, Microsoft has responded. It has reduced the licensing cost of both Windows and Windows Phone—products that will soon be merged anyway—to $0 ("zero dollars," or what most anyone would describe as "free") as long as the screen size on that device is 9 inches or less. And for bigger-screened devices (and PCs), Microsoft is now offering a new version of Starter Edition called Windows 8.1 with Bing.

The result of these changes has been immediate and has outstripped any success Microsoft could've had via technical changes to the OSes. In the less than four months since the firm announced the change, over a dozen new companies have signed up to sell Windows Phone handsets. (There was basically only one before, Nokia, plus a few also-rans like HTC, Huawei and Samsung.) We've already seen a $100 Windows-based tablet announced for the China market.

So there is a groundswell of interest in free versions of Windows, which is not much of a shocker if you're familiar with the tiny margins in the PC industry or the distrust many device makers have of Android and Google's licensing policies. But what's most interesting to me is that Microsoft isn't necessarily "following" Google here, let alone Apple, as some believe.

You can make the "how low can they go" jokes all you want, but this is in fact new territory for Microsoft. The theory here is that the firm will make money elsewhere, primarily in subscription services like Office 365/OneDrive, Xbox Music, and the like, and that the broader stable of Microsoft offerings will keep users in the software giant's camp. That's risky, because these businesses aren't exactly proven money makers.

By comparison, traditional Windows and Office licensing still represented over 50 percent of Microsoft's revenues in its last fiscal year (which just ended in June). Android-maker Google, by comparison, earns over 95 percent of its revenues on advertising, so it can take a hit on the platform side. Ditto for Apple, which is only interested in selling new versions of devices to a hopefully growing customer base repeatedly.

Google gives away the core Android platform because it's trying to attach advertising to it. Apple gives away its OS platforms because it makes money on hardware, and OS upgrades run more slowly on older devices, which helps to sell hardware upgrades. Microsoft? It always made money selling software. And while it has transitioned Office successfully to subscription services, it has transitioned the volume part of the Windows market. . . to free.

That's fairly revolutionary, as is a related to decision to make a coming Windows version for "the Internet of things"—i.e. a version of Windows for tiny, connected devices—free. I suspect some open source backers will take credit for instigating this change, but that's a bit shallow, as open source didn't trigger any major Windows pricing changes for over 20 years. Instead, Microsoft is pragmatically following market changes, and this move was in fact both obvious and predictable. The firm certainly didn't make Windows free before it had to.

But now it has to. Where Linux failed, Android has soared. Chromebooks threaten low-end Windows laptops, especially in education. And iOS is still huge in major markets like America, though it is withering before the Android horde around the globe. As with netbooks, Microsoft has simply moved the needle to compete more effectively. This was pretty much its only logical option.