Yesterday's announcement that Windows Phone and Windows for small tablets will be free for device makers was an admission from Microsoft that its mobile strategy has failed. Will it help save the company in mobile, or is it too little, too late?
The announcement came during BUILD 2014, Microsoft's annual conference for developers. The company said that makers of Windows Phone devices and Windows devices with screens of under 9 inches won't have to pay licensing fees to Microsoft.
Why the 9-inch cutoff? Microsoft isn't saying, but I don't think it's a coincidence that its own line of Surface tablets have a 10.6-inch screen, and so any manufacturer making a Surface-sized device will have to pay Microsoft a licensing fee. That will make it harder for them to compete on cost. Hardware is a low-margin business, and every dollar counts. In addition, 9-inch devices don't really compete with desktop PCs and laptops, and so giving Windows away for free on small devices don't cannibalize sales of traditional computers where Microsoft gets the bulk of its Windows revenue.
It is notoriously difficult to find out how much device makers pay Microsoft for licensing Windows. The top tier manufacturers typically pay lower licensing fees than do lower tier ones. Two years ago, a ZTE executive claimed that the company was paying between $23 and $31 per license for Windows Phone, which seems quite high. The New York Times estimates that Microsoft has been getting, on average, $15 per license for Windows Phone devices and smaller tablets.
No matter how much Microsoft has been getting in licensing fees per device for devices under 9 inches, it likely doesn't add up to much in the aggregate. Microsoft has failed in mobile and so isn't getting substantial Windows licensing revenue from mobile devices. The biggest seller of Windows Phone devices is Nokia, and once Nokia comes into the Microsoft fold, Microsoft won't be getting licensing fees from it, anyway. As for sales of under-9-inch Windows tablets, sales have been minimal. So Microsoft isn't losing much by giving away licenses to those devices for free.
Still, this is a tremendous change for Microsoft, which has long relied on licensing revenue from Windows as the company's mainstay. Patrick Moorhead, principal analyst at Moor Insights & Strategy, told Computerworld:
"It's the day Microsoft finally capitulated to the changing market driven by the disruption led by Apple, Google and the smartphone ecosystem...While I don't see this as a last-ditch effort to get traction with Windows in the mobile market, it's getting closer. Microsoft has very low mindshare in phones and tablets and no mindshare in wearables, so the free operating system, simply put, was a requirement."
Where will lost licensing revenue come from? Microsoft hopes to get revenue from the services it puts on the devices, including Bing, Outlook.com, OneDrive, and others.
Can the move save Microsoft in mobile? By itself, no. Just because something is free doesn't mean that it represents good value to people. If people prefer Android devices or iOS devices to Windows-based devices, this slightly lower cost for them won't prod them to buy Windows devices.
However, it's at least a preliminary step. The move makes it more likely that there will be more Windows devices out there that compete with Android devices, and at a similar cost. At that point, the market will decide whether WIndows for mobile devices will fail or succeed.