How Microsoft is Monetizing Windows 10

When Microsoft announced last year that Windows 10 would be free, it created a storm of ill-informed commentary about how the company would monetize the platform because surely, Windows 10 can’t be free, can it? This summer, Microsoft’s offer of upgrading to Windows 10 will come to an end, unless they decide to extend it indefinitely, which is a very real possibility. Regardless of what Microsoft decides to do, it’s time to take a look at how the company is actually making money from its newest operating system.

Microsoft recently announced that Windows 10 had passed the 270 million install mark, and while that number is impressive, as the company targets one billion devices in the next two years, they did not include a breakdown of how many of the installs are from new devices, upgrades, IOT, phone and Xbox One. It’s important to understand that while not all of these paths for installation add revenue to the balance sheet, the OEM route certainly does.

OEMs:

The free upgrade offer is only for existing devices and for those consumers who are already running Windows 7 or 8. If you are running an older version of Windows, such as XP, Microsoft is not offering Windows 10 for free.

The simplest path to how the company is driving revenue with Windows 10 is through new devices. OEMs, like Dell and HP, still have to pay for Windows 10 licenses for the majority of their devices. Any laptop or desktop sold today that comes with Windows 10 pre-installed generated a licensing cost for that device that is paid to Microsoft. The buyer is paying for this, but it is generally bundled into the price of the device, and you do not see the specific payment for the OS if you buy it through a box store.

When buying a PC online, sometimes the OEM will price out the OS, say if you want the Pro version instead of Home, but generally the base version of the OS is priced at $0.00 in the online builder with the upgrade priced with only the delta showing.

This is one of the primary mechanism that the company is using to make money with Windows 10. Although PC sales are declining, hundreds of millions of them are sold each year and will continue to do so for the foreseeable future, which means revenue for Microsoft.

Enterprise:

When the company announced that upgrades were free for those running Windows 7 or 8, there was one big caveat: the enterprise. Microsoft is not offering free upgrades to corporations, which means that they need to buy the enterprise SKU of Windows 10 for their machines.

Granted, the larger customers are likely using Software Assurance or some other volume licensing mechanism to keep their machines and licenses up to date, but this service is not free either, which means Windows 10 is helping to add to the bottom line here, too.

Apps:

While the Windows Store made its debut with Windows 8, it did not gain traction like the company had hoped but with Windows 10, we are seeing some signs of life.

The only thing worse than not having an app store is having a dead store. While it has taken its sweet time to mature, Microsoft is slowly finding the right formula to get quality apps into the store, which is important to the long-term success of the company.

When an app is sold via the store, Microsoft takes a 30 percent cut of the revenue, which means they want the store to be successful for developers so that they get a share of the revenue flowing through the store. While not a new avenue for Microsoft, this is one more way they are making money on the back-side of Windows 10.

The company is being a bit more aggressive with the app store this time around, too. They are using ‘suggested apps’ in the Start menu to entice you to open the Store and when the new inking center arrives, it too will have the app suggestions as well. Of course, you can turn this feature off in the Settings menu if you do not want to see the suggestions.

Services:

Anyone who has used Windows 10 knows that Microsoft likes to push their own services with the OS. Initially, there is a notification for you to try out Office 365, the company dangles the Groove music app in front of you, as well as Skype, OneDrive and any other services that have a premium bolt-on.

While none of these services are required, the company hopes that the integrated capabilities these apps offer will entice you to pay up for the premium versions of the services. In this way, they are using Windows 10 as a gateway to the Windows ecosystem that they hope you will eventually pay for one of their services.

The Future:

Microsoft has said frequently that Windows 10 is the last major version of the operating system and seeing as they are giving it away for free, it would seem odd if they started charging for updates once again. With that being said, we still don’t know what will happen after the first year of Windows 10 availability passes if the OS will still be free for those needing to upgrade.

It will be interesting to see if the company finds new ways to monetize the OS without upsetting a large percentage of its users. Could they eventually charge for features but not security updates? It seems certainly possible or they could create premium app experiences that would not touch the core OS but enhance the way you use the OS too.

With the company trying to get to one billion machines, putting up the paywall for the free upgrades would hinder progress toward that publicly stated goal, and I don’t see them doing that anytime soon. Considering they have many other ways to monetize the OS from people who upgrade and that they don’t want Windows 7 to be the next XP, a paywall would present a large barrier to reaching that goal.