When Microsoft released Windows 95 almost 20 years ago, people packed into stores to be among the first lucky buyers to get their hands on this cutting edge new technology. Microsoft had an iron grip on productivity software in the enterprise, but even ordinary consumers were accustomed to paying hundreds of dollars for software. Two decades later, Microsoft is releasing Windows 10. But most people won’t have to rush out and purchase a copy. Anyone with a copy of Windows dating back to Windows 7 can upgrade for free, a first for Microsoft.
The decision to forgo that traditional revenue stream and attempt to broaden the install base of Windows 10 highlights the tough choices Microsoft must make as it tries to claw its way back into the competition for mobile. It also needs to marry the strength of the slowly waning desktop world to its offerings on phone, tablets, consoles, and the cloud. The goal is to create "universal" apps that work on Windows 10 and across Windows mobile, as well as on computing platforms like Xbox and the forthcoming HoloLens.
Giving away software to try and claw back marketshare
Along with growing its user base to woo developers, Microsoft hopes it can use a freemium model, giving away more of its core software but monetizing in other ways. The margins will never again be as fat as they were in the glory days of Windows 95, but the number of people who own a personal computing device is now far larger. If Microsoft could capture a significant portion of the smartphone market, the revenue opportunity could be far greater.
There are lots of different approaches to freemium. Unlike Google or Facebook, two of its peers in consumer-facing software, Microsoft doesn’t plan to make most of its money from advertising. It wants to get people into its ecosystem, then upsell them, and the companies they work for, on professional subscriptions and enterprise licenses. It made this clear recently when it pared down its advertising and mapping divisions, two places where it could have tried to monetize mobile the way Google does. Microsoft’s approach would be closer to Evernote, or Dropbox, a company with which it has partnered in mobile.
Free software but paid storage
It’s not just Windows that Microsoft has made free. New CEO Satya Nadella wisely moved to make Microsoft’s crown jewel, Office, available for free on iOS and Android, easing the pain of working across multiple devices. Microsoft believes it can give it away and still make money."There’s still premium value that we’ll add on top of that," Microsoft's head of Office marketing Michael Atalla, told The Verge. "There will still be subscription value, most clearly and easily identifiable in the commercial space, but also in the consumer space around advanced authoring, analysis, presentation, and unlimited storage with OneDrive."
But as Nilay Patel wrote recently, that strategy faces a major challenge. On desktop PCs, many services work really well on the open web. Facebook, Periscope, and YouTube won’t be incentivized to create stellar universal apps for Windows, even if the desktop software sells well, because people can simply use their browser. And for many big mobile apps, like Uber or Snapchat, there will probably never be a desktop or web version. A great desktop OS isn't enough to lure a broad base of third-party developers. Windows Mobile still won't have critical mass. The chicken-and-egg problem persists.
Who in their right mind would pay for "track changes"?
If Windows 10 is an excellent desktop operating system, erasing the painful memories of Windows 8, it will probably help to grow the number of businesses that pay Microsoft in the short term. But the long-term trend for PCs remains dismal. And it’s really hard to imagine creating a meaningful business around asking the average consumer to pay for "premium features" like chart element customization and track changes.
Benedict Evans, an investor with Andreessen Horowitz, paints a grim picture:
"Consumer PCs, slowly, will be a shrinking platform. Meanwhile weakness in mobile also bleeds back to the desktop and undermines Office. The shift away from the PC will be slower in the enterprise than in consumer internet, and so will the rise of alternative software models. But as I discussed here, the rise of SaaS services and new productivity models on one hand and more and more capable mobile devices on the other means that Office, and hence desktop Windows in the enterprise, is also probably a declining model."
Windows 10 must be a bridge to the platforms after mobile
Evans' conclusion is that Microsoft should admit defeat and look for new avenues outside of Windows to regain its footing and forward momentum. He is dismissive of Xbox, but I think that may be a mistake. The television, and smart devices connected to it, represents a new computing platform that is poised to explode. The smart home requires great voice and visual recognition, which Kinetic and Cortana can provide. Virtual and augmented reality is the other big opportunity. In the long term, the best thing that could come out of Windows 10 would be a system that pushes people to choose Xbox and HoloLens over the competition in those areas. It’s the strongest chance Microsoft has to halt and perhaps reverse the decline of its primacy in the world of modern computing.