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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. Satya Nadella-led 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 subsidised 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 monetise 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 per cent, 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 per cent 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.
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 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 the company expected to make about $15 billion in revenue from Windows during its last financial 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.
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.
©2015 The New York Times News Service
