Microsoft would only require $7 per user to make Windows 10 free

With all of the excitement of Windows 10, one thing that has been left unanswered is the pricing of the licenses. That’s not all too surprising though as this release was for the enterprise segment.

It does, however, raise the interesting question of how Microsoft should go about getting people to upgrade to their latest OS. One of the rumors that has been circling around is that Microsoft might give away Windows 10 as a free upgrade to Windows 8/8.1 users via Windows Update. This rumor has been circulating after Terry Myerson’s comments at BUILD 2014 where he described the start menu as coming “in a coming update for Windows 8”, which (for Microsoft), update usually means free.

Other rumors have also been circulating such that Microsoft may give away Windows 10 for free to Windows 7 users and even XP owners. While that sounds like a great idea for getting everyone on the latest platform, will it work? And wouldn’t Microsoft be losing a lot of money? Those were my initial assumptions on the situation, but after doing a lot of research on the subject, my opinions have changed. Let’s get down to the nitty gritty and see if it would actually be worth it for Microsoft to give away Windows 10 for free.

Now before I go to far, I think I should clarify what I mean by “give away for free”. I am not referring to people who build their own PCs, OEMs, and enterprise. What I am referring to is the suggestion that maybe each Windows license should be linked to your PC and that as long as you use that PC, you own a copy of Windows, whether it be 7, 8, or 10 and that you shouldn’t have to buy another license for the same product. If you build a PC, you need a license for that PC, but once you buy it, it should be yours until you get a new PC. Similarly, if you’re buying a PC from an OEM, you own that PC and (indirectly) the license for that PC and should own the license as long as you’ve got the device.

There are actually some valid points to be made as to why the pros for going down this route would outweigh the cons.

(And no, none of those reasons have anything to do with “Well, Apple and Google do it”. All of their business models are different.)

Relatively no one buys their computer for a new OS. I realize that most of the people reading this probably have Windows 10 installed on their PC and they upgraded to Windows 8 the second they saw that $40 price tag, but the fact of the matter is that relatively no one really buys a phone/tablet/PC for a new OS, regardless of what it is. To most people, it doesn’t matter what Microsoft puts in Windows 10, they just use their computer to browse the internet, play a couple of games, and type documents, so putting a price tag on it wouldn’t gain the company much additional revenue (more on that later), but that also means that it won’t have much of an effect on OEM sales.

For further proof of this, let’s go from the world’s most popular OS to the second most popular OS, Android. At the beginning of every month, OpenSignal creates a very detailed image of the fragmentation found in Android (which you can find here).

In the report, you’ll see that Android users also never spend money to upgrade the newest OS. For example, Android phones running 2.x (which were released 4 years ago), still make up 14% of the market. Android 4.1 Jelly bean (which was released about the same time as Windows 8) still runs on over 1/4 of all Android devices.

Both OS are used by over a billion people, and 99% of them couldn’t give a care in the world about what OS their device is running. Heck, they probably wouldn’t even know what version of the OS their phone is running if you asked them. They just want it to work. It’s why Windows XP still makes up 20% of the market, because it’s “good enough”. Both require spending a decent chunk of cash to get the latest OS (Windows for buying the software and Android for buying the hardware, although you can still work around both of those if you’re into that sort of thing), and since most people require basic functions plus a little extra, there’s not much that either Google nor Microsoft can do to compel the average person to spend money on a new OS.

The PC market has pretty much grown as big as it’s going to get. This one may get a bit more controversial, but the PC market’s user-base of 1.5 billion people isn’t going to get much bigger. Now sure, as the world’s population increases, you could argue the PC market will increase too, but there’s also the fact that less and less of those people that own them are actually getting new ones. It’s not a large number by any means (probably just someone’s grandmother or someone that can’t afford a new PC), but there are some people who’s main computing device could just be their phone or a tablet.

For the sake of making this too complicated, let’s just assume that even as trends shift, the PC market will always be 1.5 billion strong. Assuming that there will be no other growth in numbers, it’s essential for Microsoft to try to get as many people on the same platform as possible, and if there is no growth from new users, then Microsoft has to do it via software.

Let me give you an example of what I mean. This isn’t a direct comparison, but it shows you why Microsoft can’t rely on a larger user-base to grow Windows: Imagine there’s 1.5 billion people living in “PC land”. Now imagine there’s a brand new OS called OS A (wouldn’t it be funny if there was some Linux distro with this name?) and it sells tons of copies, let’s say 750 million. Great, 1/2 of the PC land is on OS A and the rest have no OS (follow me on this).

Now, let’s say that a few years go by and prices of new PCs come down and the follow up to OS A comes out and it’s named OS B. Now, OS A users don’t like OS B and they don’t want to pay for something they don’t like, so they don’t upgrade; however, these new users who can now buy a PC want a new PC, but they can only buy OS B, so they buy OS B. Great, now you’ve got 1/2 of your users on one OS and another 1/2 on an older version.

What are you to do? Well, you could release a new OS called OS C. OS C seems to be like an easy transition from both OS A and OS B and is able to satisfy both crowds. Both are responding well to the upgrade, but only some of them can afford it, so now you’ll have some on OS A, some on OS B, and have the ones who want to upgrade on OS C. Your userbase is now split into three different OS.

What can you do now? Well, you can’t rely on new people coming in and helping the percentage of OS C to go up, since you’ve already sold a copy to everyone who will have one. People on OS A and OS B are satisfied with their OS and don’t want to pay the money to upgrade, but they would take it for free. So you give it away for free and suddenly you’ve got almost all of your user-base on OS C as opposed to fragmentation (which is good, because OS C contains a really nice app store that you want to push developers to, so you need users, but more on that later).

“But then how did that company make back their mon…”*slap* more on that later.

Microsoft may actually GAIN money by giving away Windows for free (no seriously, hear me out)

Now I know what some people are saying. You’re thinking “Microsoft can’t give away Windows, Microsoft IS Windows”. Not necessarily. Over at the reliable ZDNet, Ed Bott collected Microsoft’s annual reports since 2002 all the way to 2013. In it, he notes how Microsoft has successfully diversified its portfolio and how Windows actually makes up only 20% of Microsoft annual revenue, although they do still make a little over 30% of their profit (as in revenue – the cost of expenses) from Windows sales, which amounts to about $9 billion dollars.

Now, even for a company like Microsoft, who made $27 billion in profit in 2013, they still can’t just throw away 1/3 of their total profit for the sake of market share. That’s more money than some countries make in 3 years. Well, that’s when I decided to dig into the reports and crunch some numbers myself, and I think I’ve found some interesting tidbits.

Now, while Microsoft’s Windows division made $9 billion, only 35% of that came from consumers and enterprise, while 65% came from OEMs, which again, are going to be paying for the licenses. So taking that into account, Microsoft would only be losing $3.15 billion per year. Now, again, I realize they can’t throw that money away and they probably can’t rely on Azure, Office, and Server to make that back, so how would they continue to increase YoY profitability then? Well, more on that in a second (I promise that will be the last time I do that).

Over the years as more and more customers focused less on their platform and more on the services that are running on them, so has Microsoft. Satya Nadella had described the company as a “mobile first, cloud first” company in a move away from Steve Ballmer’s “Devices and Services” company, but in reality, they’re both saying the same thing, but Satya is trying to leave his own motto on the company to distance himself of the Ballmer era. You’re going to be running these services from the cloud and will be running them on mobile devices, so they’re essentially the same thing.

Which, dear reader, is how Microsoft will make its money back: Services. What? Did you think I had some dramatic conclusion that I was alluding to? No, it’s much more simple than that.

Now, I know what you’re thinking, “but Jason, how will they make over $3 billion from services per year?” Well, I know that seems like a lot, but hear me out.

Doing some rough number crunching, I took the amount of people on Windows 8 verses how many were on Windows 8.1, then took away new device sales and came up with the conclusion that roughly 30% of all Windows 8 devices have updated to 8.1 (which should be higher, but Microsoft decided to make it difficult for regular users to figure out how to upgrade). So now we have a basis on how many Windows users are willing to upgrade to the latest version.

(Now, while it would be reasonable to take away some of those numbers because of enthusiasts who know how to upgrade, I also took into consideration how much easier it would be to make the update available Windows Update as opposed to the confusion that updating via the Windows Store created, so 30% is actually a conservative number.

Also keep in mind what I said earlier about consumers not upgrading their PC just for a new OS, so this will not suddenly anger their partners, as most wouldn’t buy a new computer until their old one broke, regardless if it ran Windows 7 or Windows 10. )

So, if we take 30% of that 1.5 billion user-base who would update from their current version of Windows to Windows 10, we would get 450 million people. (Note: some of these people will  be enterprise customers who will pay for the license and services such as Software Assurance, but I’m trying to make as conservative of an estimate as I can in my initial estimates). So now, by taking that $3.15 billion that they would lose in a year and distributing that cost over those 450 million people on Windows 10, they would only need to make $7 per person in a year. Put it another way, they  would only need to make $1.75 per user in a quarter. They’ll probably earn more than that from people accidentally clicking on Bing ads.

Now, while Microsoft would only need to make $7 per person in a year, which they’ll surely do from people using Bing, looking at the MSN apps, gathering money from the Windows Store and people buying into Xbox Music and Xbox Video (of course, Microsoft has to make a compelling case for people to use the Xbox apps over other services such as iTunes), that’s just direct benefit. There are some indirect benefits to this also. Getting on the latest version of Windows could also see a benefit in Windows Phone in Xbox sales (more so the former than the latter). With people familiar with the Modern UI, they won’t see Windows Phone as so different an foreign than their current iOS or Android. It also means that they’ll be invested in the Windows Store, which using Universal apps,  means that if a person wanted to try Windows Phone out, they could already have a decent collection of apps built up and waiting for them.

Now, I would like to point out that that $7 a year is a very very conservative estimate. With the Windows Update process being much easier than it was trying to get the update to work (and not constantly fail) from the Windows Store, I honestly see no reason that that number could not jump to 50% or even 60%. That would bring the number of people using Windows 10 to approximately 825 million. I also added the enterprise in with consumers in non-OEM sales of Windows, and enterprise customers spend significantly more than consumers. I can’t find any hard numbers on the ratio of enterprise to consumers, but even if we assume that only half of that $3.15 billion are from consumers, that leaves us with about $1.6 billion for consumers in a year. Spreading that number out and you get less than $2 per person per year.

It’s also note-worthy that even though I counted Windows XP users in with Windows Vista, 7, and 8 users, they will end up having to get buy new computers anyways (just look at the system requirements), so they’ll end up paying Microsoft more than that $2-$7 a year anyways.

Another added benefit is that with those 825 million users that I previously mentioned, Windows 10 would become the single largest operating system on the planet, and if Microsoft can get people to stop using the desktop and start using the Windows Store (which is their master plan, anyways), then that could make the Windows Store the go to app store for developing apps. If that happens, say goodbye to the app gap on Windows tablets and Windows phones, which will also increase their uptake from consumers.

Obviously these numbers aren’t exact and only Microsoft knows precisely how much they would make off of this. They’ve got professional accounts that do nothing all day but think of different ways to make Microsoft more money, and I’m sure that this idea is on their radar. I do think, however, that these numbers show a compelling case for Microsoft to give away Windows as a free update to all of it’s users.

What do you think? Should Microsoft give away Windows 10 as a free update? Let us know in the comments below!

One thought on “Microsoft would only require $7 per user to make Windows 10 free

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