Microsoft is being attacked on all sides lately. Its biggest threat in recent years has been the growth of mobile devices, which also brought the rise in popularity of competing operating systems like iOS and Android. Even if those two are not “desktop operating systems”, they still represent a huge threat to Microsoft, because people spend more time on them and therefore less time on Windows PCs.
If Apple’s iOS and Google’s Android evolve into much more functional and more productive “desktop-like” operating systems, then they will turn into real problems for Microsoft, even on the PC side of the business. By then, billions of people will already be used to those operating systems, so when the more productive tools and apps arrive, it will feel perfectly natural for users to continue using those operating systems for more advanced tasks. That’s why, if that happens, it will be too late for Microsoft to react.
Microsoft is ultimately fighting a platform war, even if the platforms aren’t completely interchangeable right now. Platform wars are usually decided at the low-end of the market, because that’s where the volume is and where a platform player can get most of the market share. It’s basically how Microsoft won the war against Mac OS on PCs, too, but this time they're on the receiving end.
The stagnation in PC sales over the past few years and the slow adoption of Windows 8 have also made old problems worse for Microsoft - problems like the “naked PC”. IDC research manager Handoko Andi says that up to 60 percent of the PCs being sold in emerging markets of Asia, are “naked PCs” - PC’s that don’t come with Windows pre-installed (which means Microsoft doesn’t get any revenue on them), but with some open source Linux distribution.
In such markets, where people tend to buy cheaper PC’s, the cost of a Windows license, even a bundled one from the OEM, can be pretty significant compared to the total cost of the PC. So people prefer the versions of the PCs or laptops that come with a free OS. After that, if they actually need Windows, they pirate it.
That’s how, despite the emerging markets accounting for 56 percent of Windows installations, Microsoft only made over a billion dollars from China, Russia and Brazil combined, out of the $77.8 billion that it made last year (with 56 percent of that revenue and 78 percent operating profit coming from Windows and Office). That revenue is insignificant compared to the total installations in these markets.
Free Windows 9 upgrade?
There has recently been a rumor that Microsoft might offer Windows 9 as a free upgrade for Windows XP and Windows 7 users, in a move to get almost everyone on the latest version of Windows.
From a platform war point of view, that makes sense, especially in these emerging markets, where they are either going to use a different (free) operating system, or they are going to pirate it. Microsoft still has to try and win the platform war somehow, but at the same time, is it really “winning” if they end up giving their operating system for free?
If Microsoft thinks it can recover the money through other means, such as getting the people who use Windows to buy some other products from Microsoft, then it could work, but only if Microsoft is committed to this “free Windows 9” strategy in emerging markets, at least.
But there are still some questions that need to be answered and some potential problems with this strategy, too. One question would be: How long is Microsoft going to update this free version of Windows 9?. If they’re only going to update it for a year, it’s doubtful the strategy will work in convincing people who weren’t paying before for Windows to pay now. Some would pay, but likely not most.
Another question would be, is Microsoft really giving Windows 9 to all Windows XP and Windows 7 users, or only the licensed ones? Because if it's the latter, then that won't change adoption too much in these markets where piracy is very high, either. Microsoft would just be giving a free upgrade to people who were already paying customers.
The potential problem with the free Windows 9 strategy is that they may not be able to give it for free only in emerging markets and then charge those in developed countries. These customers could end up feeling cheated and decide to boycott Windows 9, which also wouldn’t be great for Microsoft’s revenues.
Right now, the free Windows 9 upgrade is still mainly a rumor, perhaps started by Microsoft to see people’s reaction to it, so it may or may not turn into reality. But if it does, while potentially a good solution in Microsoft’s platform fight, especially in emerging markets, it also poses great risks to Microsoft’s business model for Windows. Microsoft needs to tread very carefully with this strategy.