Microsoft finds its $0 Windows Phone business model

Microsoft finds its $0 Windows Phone business model

Summary: Office 365 is becoming the jewel in Microsoft's mobile strategy following its decision to remove Windows Phone licensing fees for OEMs.

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With a new cloud-mobile business model in tow, Microsoft yesterday made Windows Phone and Windows free for devices smaller than nine inches.

Along with personal assistant Cortana, new customisable notifications in Action Centre, and extra enterprise features to boot, Microsoft has finally laid to rest its ambition to charge OEMs a fee for Windows licences on mobile devices.

It's not really known what Microsoft used to charge OEMs for Windows Phone licences, but in 2012 a ZTE exec was quoted as saying it cost the company around $20 to $30 per phone — figures that were probably dependent on volumes sold.

Though Nokia's licensing terms with Microsoft for Windows Phone were never revealed, at the time it announced its still to be finalised acquisition of Nokia's devices business, Microsoft revealed it gross profit margin per device on royalty payments was less than $10 per unit.

At the time Microsoft said it was aiming to take 15 percent of the world's estimated 1.7 billion smartphone market in 2018, but how that was possible when Android was "free" — albeit hampered by Microsoft's wide-ranging Android licensing agreements — remained a big question.

Last month it emerged that Microsoft had changed tactics, offering Windows Phone licences for free to its new Indian OEM partners, Lava and Karbonn. As of yesterday, it's got a new partner in the country too: India's Micromax has now also  joined the Windows Phone fold.

Yesterday at Microsoft's Build conference, Windows boss Terry Myerson confirmed free would be the way forward for Microsoft, as the company refocuses away from its $19bn desktop Windows cash cow towards becoming a devices and services business — something it demonstrated with the acquisition Nokia's devices business and the launch of its Surface line of tablets.

"To accelerate the creation of great mobile devices running Windows and grow our number of users, we announced today that Windows will be available for $0 to hardware partners for Windows Phones and tablets smaller than 9 inches in size," said Myerson.

Of course, the $0 charge doesn't mean Microsoft hasn't got a revenue-generating business model — one of former Microsoft CEO Steve Ballmer's early gripes with Android — and comes as the company expands Office to the iPad through Office 365.  

"This offering also enables hardware partners to provide their customers a one-year subscription to Office 365," Myerson noted. "These steps will help our partners to deliver the rich experience of Windows plus best-in-class hardware, software and services to consumers at affordable prices."

"For partners, this makes it easier to bring more compelling devices to market. For developers, this means more endpoints for their apps in a store that’s already growing at about 50 percent a year. And for consumers, it will mean a broader range of great smartphones and tablets at prices that will be competitive with anything on the market," he added.

Read more from Build

Topics: Mobility, Microsoft, Nokia, Windows Phone

Liam Tung

About Liam Tung

Liam Tung is an Australian business technology journalist living a few too many Swedish miles north of Stockholm for his liking. He gained a bachelors degree in economics and arts (cultural studies) at Sydney's Macquarie University, but hacked (without Norse or malicious code for that matter) his way into a career as an enterprise tech, security and telecommunications journalist with ZDNet Australia. These days Liam is a full time freelance technology journalist who writes for several publications.

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34 comments
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  • Yes, Microsoft is doing the right things

    Once hooked to Office, always hooked to Office!!!
    samirsshah@...
    • Really Free

      For many Android installations Microsoft collect a fee from the manufacturer for patent usage. Sometimes others also collected fees for there patents. If Windows Phone is free it could actually be cheaper than Android since Microsoft has already dealt with the patent issues.
      MichaelInMA
      • Microsoft's "Patents" are specious, at best

        If you look beyond the "Microsoft PR" pieces, you'll understand. The strategy was brilliant, threaten to "keep suing" till the OE went bankrupt, or pay $15-$20 per device. This is something Microsoft copied from IBM. Microsoft copies everyone else's ideas, because they have no good ideas in house.
        I hate trolls also
  • Microsoft is becoming an "Office first" company

    and I really like that, as I believe Office is its' strongest product, and is certainly its biggest moneymaker (by quite a margin.)
    Mac_PC_FenceSitter
    • Yes but...

      The Server and Tools division is also a huge money making business too, and it's growing at a rapid pace.
      Joe_Raby
      • And..

        Xbox Live is a huge money maker also. Microsoft has many huge money making areas due to their market penetration.
        root12
  • Microsoft finds its $0 Windows Phone business model

    This was a surprising move from Microsoft considering people would willingly pay for Microsoft based products. The revenue from using Microsoft Office 365 and Microsoft OneDrive will make up for the sale of the Microsoft Windows.
    Loverock.Davidson
    • They're still going to pay for Microsoft based products

      This isn't a giveaway to consumers - you will still have to pay for a Windows phone, you personally will not get anything free - this is an omission of charges to the OEMs who put out Windows phone running hardware.
      Mac_PC_FenceSitter
      • It is a "giveaway" as far as Microsoft is concerned, and the OEMs

        won't be having to add the WP license to the total price of the phones. So, yes, it is "free". MS hopes to make it up through other services which can be "sold" or "leased" via those phones.

        Android is also, not free. To use Android, people pay Microsoft, indirectly. And, people "pay" Google by allowing Google to use their information, and turning those people into "revenue generating assets".
        adornoe
        • Funny you mention that

          " people "pay" Google by allowing Google to use their information, and turning those people into "revenue generating assets"."

          In case you've been sleeping the last several years, Microsoft has been copying Google, in that area. You do know, that Microsoft keep a record of everything that passes through their servers? Including "Skype" calls WP geolocation data, as well as any WiFi hotspots the phone gets near. Yet Microsoft likes to point at "the other guy", and say however it is. This crap with "to the cloud", is nothing more than the desire to charge you to access your own data, which is why all cloud based things suck.
          I hate trolls also
          • You failed to understand my comments...

            where I do state that, what MS is doing is making the OSes "free", but that they're going to get their revenue in the back end, where other services and software won't be "free".

            You also fail to understand the difference between the "free" that Google does, against the "free" that MS does.

            Google make Android "free", and Google search is also "free", but captures people's data, and turns those people into targets for their advertising. Microsoft gives away their OS for "free" and doesn't depend upon capturing the data from the users and then turning those users into "revenue generating assets" via advertising. MS depends on the "free OS" customers to become, ON THEIR OWN, paid customers for other services.

            The differences are huge. One is a company which depends on targeting everything people do on the internet to make their money, the other depends on people signing up for paid services. If you can't see a difference there, then, you need to go to Common Sense 101 classes.
            adornoe
          • I'd much rather have Microsoft's model

            ...but don't pretend Microsoft doesn't want to make every dime they can out of advertising, too.
            christoban
    • see, Mr. davidson why many of us have cheered for the competition?

      such as from google and apple. It has resulted in lower prices and more choice, perhaps better products even from MS. While you apparently would love to see MS continue to monopolize everything for some reason.
      drwong
      • So you are now getting

        lower prices and choice from Apple?
        thekman58
      • Actually...

        Actually what we have now is a duopoly, where Google and Apple effectively own the mobile mobile and advertising markets. Others can't get in partly because app developers can't afford to target more than two very disparate platforms, partly because free software is impossible to compete with.

        In part, Microsoft's strategy going forward is to make it much easier to develop multi- and cross-platform apps, with their universal apps and their partner, Xamarin. By open sourcing the C# and VB.Net compilers and other big parts of their platforms, they're removing barriers others have to target the platform.

        In fact, I strongly believe the easiest way to write a cross platform Anroid+iPhone app these days is Xamarin, on the .Net platform. You can do so in C, C++, C#, VB, or even JavaScript, with tooling and an integrated experience that puts Apple and Android's tools to shame.
        christoban
  • They have da money

    Microsoft gets from money OEM's when they use Android, so that really funds their windows software. Also Microsoft is so huge and powerful that it can, and does, price others out of the market.
    root12
    • Sure

      Like how they price the free Office software out of the market... Oops they don't. People will pay for quality, or prestige, look at Apple. Look at Mercedes do you think people buy mercedes because they are the best car, they buy it for the symbol same with Apple.
      schultzycom
      • Shhh

        Logic doesn't apply when bashing Microsoft.
        christoban
    • The funny thing is

      giving Windows Phone to OEMs free makes Windows Phone cheaper than Android. Android requires paying patent fees to Microsoft and using Windows Phone doesn't. I guess you can compete with free.
      Jason Joyner
      • The OEMs only pay a typical Fat32 LFN licensing fee just like any device

        with removable storage. Or cross license with them. The assumption that MS get billions from android, just because MS trumpets these licensing deals, is incorrect. This is why google doesn't pay MS for pure AOSP based devices.
        drwong