Microsoft's 'go-low' play puts Windows revenue on the line

More services revenue, less from devices? Is that the new strategy?

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By going after low-priced, high-volume markets, said Berenson, Microsoft hopes to gain enough growth to attract more developer interest, which would feed into a virtuous cycle of more growth. And once within the Microsoft ecosystem, those customers would be fodder for higher-priced hardware in the future.

It's also a defensive ploy against additional Android -- and thus Google -- inroads into Microsoft's services turf, Berenson added.

Ben Bajarin, an analyst with Creative Strategies, echoed Berenson's point when he said Tuesday that the Nokia X line had the potential to bring in "hundreds of millions" of new customers into the Microsoft services ecosystem.

If Microsoft is giving up the very high margins that it's made selling software, it must plan on making it up on volume, or more likely, figure it can create a sustainable market for consumer-grade services, whether based on advertising, like Bing or Outlook.com, or on fees, such as Office 365, OneDrive and Skype.

But that begs the question of whether the company would take the Windows 8.1 licensing price cuts to their natural conclusion: Make Windows free to OEMs (original equipment manufacturers) that build PCs and tablets, and to ODMs that assemble smartphones.

"That would be a bitter pill to swallow," said Thompson, in an understatement. "But it would be a natural step in the move to being a pure services business." More likely, in his opinion, would be to make Windows free for tablets -- strictly tablets, not hybrids or 2-in-1s -- but he acknowledged that could be a long ways off. "They might not be ready to do that."

"I think they've already realized that the licensing revenue model is going away," agreed Singh. "The proposed 'devices and services' strategy certainly hints at that."

But realization of a far-future and making money in the present are two entirely different things. "I think their plan is to eventually monetize hardware and services, which means license costs will drop to zero," Singh added. "But that depends on how effectively or quickly they can monetize those two businesses. I don't see them getting rid of license costs, even in limited situations, unless they're confident in their devices and services businesses."

And even with low-priced tablets in its partners' portfolios, Microsoft could struggle to see any income. "In emerging markets, the low-end notebook market is rapidly being cannibalized by cheap tablets," Singh said. "In a lot of cases, these devices may never even be connected, so it's difficult to see [Microsoft's decision] as a direct services play."

The alternative, however, would be to let everything slip through its fingers, contended Thompson. "Anything running Google's software is a disaster for Microsoft," he said. "No OS money, and no Microsoft services. Something with very cheap Windows may limit the OS revenue, but at least they still have the inside route on offering services and Office."

Milanesi sounded as skeptical as the others that Microsoft would, or could, take Windows free in the foreseeable future, although the recent price cuts for cheap tablets and PCs made all the sense in the world. "If I'm looking to sign up with the 'white box' vendors," said Milanesi, referring to the lesser-known regional companies manufacturing smartphones and tablets, "the model just won't work if Microsoft charges much for a license. It's quite easy to see that a white box vendor just wouldn't be successful with Windows otherwise."

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at  @gkeizer, on Google+ or subscribe to Gregg's RSS feed . His email address is gkeizer@computerworld.com.

See more by Gregg Keizer on Computerworld.com.

Copyright © 2014 IDG Communications, Inc.

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