Microsoft's monetization dilemma: Bundling's not all it's cracked up to be

Microsoft's monetization dilemma: Bundling's not all it's cracked up to be

Summary: If and when Microsoft makes Windows 8 free, how will it monetize it if so many of its core services and key apps are built-in for no extra charge? Let the experiments commence.

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TOPICS: Windows 8, Microsoft
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Bundling services into an operating system is a two-edged sword, a lesson with which Microsoft is having to come to grips.

wzorbingwin81
Credit: Wzor.Net

By including free, integrated apps and services like Office, Skype and OneDrive as part of its Windows and Windows Phone operating systems, Microsoft is offering users some decent freebies for taking the Microsoft plunge. But that practice also makes it trickier for Microsoft to monetize its own products.

A couple of recent reports have suggested Microsoft is moving toward chopping the OS licensing fee for its Windows (and possibly also its Windows Phone) OEMs by a substantial amount. Earlier reports suggested Microsoft might go so far as to license its Windows Phone OS for free.

If Microsoft does this, according to conventional wisdom, it can count on making up the difference by collecting revenue from OEMs and customers for its apps and services.

But that argument ignores the current reality where those apps and services are available as "part" of the OS. Microsoft's OneDrive; Bing Maps and other Bing apps; Xbox music streaming; Bing SmartSearch; and the core Office apps (for Windows RT users) all currently ship for free with Windows 8. And OneDrive, Bing, Xbox music streaming and Mobile Office all ship for free with Windows Phone 8.

Will Microsoft have to pull a Google and take away previously free services, like Google did with Google Apps for those without business accounts? Can the Redmondians count on charging extra for things like additional OneDrive cloud storage (beyond the initial free 7 GB new subscribers get automatically) to take up the slack? Or is there some other way the company can offset its losses if it drops the price of its Windows and/or Windows Phone OS to free?

It seems the company is in the midst of investigating this.

There's a new SKU, or version, of the upcoming Windows 8.1 Update 1 operating system release that is known as "Windows 8.1 with Bing." Known Windows leaker WZor revealed the existence of this new SKU a week ago. Since then, many have been trying to guess what this thing is, given that Windows 8.1 already includes Bing SmartSearch by default. (Bing SmartSearch is the built-in version of Bing that searches a user's PC -- though not mail -- OneDrive and the Web from a single query.)

This new SKU, from what my contacts are saying, is key to Microsoft's experimentation with monetization. I hear this SKU has only minor differences from the current Windows 8.1 SKUs, but that it may be a kind of placeholder for the future when consumer operating systems are, basically, free. I'm not sure if this SKU will offer OEMs and/or consumers new Bing-related incentives by the time Update 1 is made available this spring.

Microsoft has dabbled with offering OEMs deals in the past to push various new apps and services. In 2010, Microsoft charged PC makers $2 per copy for Office Starter 2010 Edition if they also agreed to preload the Bing Bar and Windows Live Essentials. If a PC maker wanted Office Starter 2010 only, Microsoft charged $5 per copy for it.

The company also has and continues to experiment with ways to incent users of one of its services to try other Microsoft services. Just this week, Microsoft was offering members of its Bing Rewards program 100GB of OneDrive cloud storage in exchange for 100 Rewards credits, which is worth $50. Microsoft touted the deal as a "perk for our most consistent and loyal Bing users."

There's a change in the way Microsoft execs are thinking about the role of Windows inside the company these days. Windows and Windows Phone are seen internally as being powered, at least in part, by Bing. Maybe, as crazy as this might have once sounded -- and still may sound -- they'll be monetized by Bing, moving forward, as well. 

Topics: Windows 8, Microsoft

About

Mary Jo has covered the tech industry for 30 years for a variety of publications and Web sites, and is a frequent guest on radio, TV and podcasts, speaking about all things Microsoft-related. She is the author of Microsoft 2.0: How Microsoft plans to stay relevant in the post-Gates era (John Wiley & Sons, 2008).

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38 comments
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  • I think Microsoft will have to keep the OEM licenses for Windows

    that is a very valuable thing. No PC maker is going to go "all Chromebook" any time soon. But there is no question, Microsoft will have to move some of their platform revenue over to advertising, for a few reasons.

    - One is the loss of revenue on the low end. As your other articles note, they've had to cut the OEM fee there.
    - The other is to weaken opponents: Google has been weakening Microsoft by hitting it where it is strongest, not weakest... going against everything Sun Tzu ever taught. So Microsoft should counter, by fighting Google where it is strongest - trying to take away the ad business. I think Microsoft is already working at that, but they need to get even better at it.
    Mac_PC_FenceSitter
    • Well rounded

      Microsoft is very well rounded company and fortunate they can discount certain things and perhaps overcharge for others. Its a balancing act, and the gross profit evidence throughout the years shows they are pretty good at it. Google is much the same way with a wide portfolio to fall back on. A company like Apple is very consumer heavy and may have a hard time if consumer tastes change. Fascinating they are all doing really well at the same time.
      marc_w
      • not well rounded.

        Microsoft has become a company that us a had of all trades matter of none company.

        In other words, Microsoft is turning into the Norton Security Suite for software. With a whole suite of products only two stand out, but for the consumer they are costly and unexciting.
        VictorWho
      • Google anything but well rounded

        Over the last 4 years, Google have averaged revenues of around $14bn per quarter, 80% of which were earnings from ad revenue.

        If someone was to seriously dent Google's core revenue stream, it could very significantly impact Google's earnings.

        Will Microsoft be able to do this? Only time will tell, but any company (or investors in) with a significant portion of its revenue stream that is accounted for by just one source should be very, very nervous.
        bitcrazed
        • Not so simple

          Web advertising is growing, with mobile explosion even more, and Google is so far ahead of the pack. Yes there are risks, but there are always reasons to be afraid... others to be bullish.
          Microsoft advertising is going to be hard sell - MS's platforms are becoming less relevant and they don't stand a chance without "scroogling", collecting informations is a huge advantage to present the right ads to the right persons in the right location.
          AleMartin
          • Microsoft already is "Scroogling"

            Anyone who reads their Privacy Policies and Advertising offers can see that they are selling based on user habits and actions. Microsoft would, however, have to fess-up to doing so while pointing the finger of shame at Google.
            WhoRUKiddin
    • Microsoft Has An "Anti-Business Unit"

      The sole purpose of which is to fritter away money.

      This unit is responsible for: trying to buy Yahoo (whew... close call); sinking billions into Bing; p*ssing away billions by overpaying for Skype; having a Money bonfire with Surface; wasting billions on Nokia and Windows Phone; wasting millions of dollars and countless man-hours on Windows RT; blowing another billion developing Windows 8; and a miscellany of other expensive and nonsensical financial foibles that we have long since forgotton about, because they were written off years ago.

      If Microsoft were a mental patient, they would be locked in a pastel blue painted room, wearing a straight jacket and foaming at the mouth!
      orandy
      • Randy, look around you.

        The walls are pastel blue, you're wearing a straight jacket, and you're foaming at the mouth.

        Randy, you ARE a mental patient.
        ForeverCookie
      • Diagree

        I think you're completely off base here. By your line of thinking Microsoft should never try new things or invest in anything new. What exactly were they supposed to do just focus on Office and not worry about anything else?
        Sonic98
    • Their business plan is outdated.

      People don't understand what's really going on here with Microsoft. They simply do not know how to become a FREEMIUM company. They are being cut in knees by Google because Google products and services are excellent and free. That's because Google has a sound revenue know model, whereas with Microsoft's is outdated. Despite Microsoft's Scroogled campaign, users don't mind Google because they know they are not being hurt buy them. They simply don't see or feel the FUD.

      Microsoft can either do two things:

      1. Copy Google'business plan and revenue Model word for word, or
      2. Come up with their own unique one because their current one is not working any more.
      VictorWho
      • MS' business is bad its the type that MS uses?

        You realize that the bulk of Google's revenue comes from people paying them money to run ads? So what is so right about people paying for ads, and what is so wrong about people paying licensing fees?
        P. Douglas
  • Microsoft's monetization dilemma: Bundling's not all it's cracked up to be

    Microsoft should be doing fine with its current set up. Selling the licenses for cheap, then sell the cloud services like Microsoft Office 365. Its double the income.
    Loverock.Davidson
    • yup...

      This... cloud based subscription services and ad revenue should be a more lucrative revenue stream than licensing.
      widow maker
    • Windows and other subscription services

      Well MS could provide Windows on PCs through the usual up front / one time payment, or as a subscription like Office 365; and maybe charge $15 to OEMs, and $15/year to users for maybe 2 years, starting from a year after they purchase their PCs.

      I've seen Windows 8 apps that use in-app purchasing such as Asphalt 8, and the app does an excellent job in providing a compelling environment, where the only way to be satisfied and come even close to winning races, is to buy cars and upgrade them for real money. So before you know it, you are plunking down a lot a money for stuff in the app. MS should probably therefore make the paid versions of its services be starkly better than the free versions, in order to get people to upgrade.
      P. Douglas
      • Or Microsoft could

        claim they own patents on baking cookies and shake-down the Girl Scouts and Granny for license fees if they want to continue baking cookies.
        WhoRUKiddin
  • My hope

    I just hope that Microsoft does not go the way of google - free stuff but ads everywhere. We sometimes ask why manufacturing has left. Here is one of the reasons. We do not want to pay for stuff, we want ad companies to pay. It is quite disgusting.
    paul2011
    • you are parroting the usual google rhetoric

      Where are there "ads everywhere". Oh, you mean on all these web pages? I don't think google is responsible for most of those.

      Small sidebar links I never notice in my gmail? Ok you got me there.

      On google search results? Sure but same ads in Bing search.

      Ad banner in my free android apps? Same on the iPad, and on WP.

      On my son's xbox 360 that we were shelling out $60/year for xbox live, I have the privlege of occasional unrelated video ads in the tiles. I found that just so frustrating. Fortunately the subscription has expired.

      Have you also noticed that most web pages (and broadcast TV and magazines and newspapers) exist to get you to read/watch them so they can make money off the ads so people can make a living? Without ads, TV, media, the internet (for better or worse) would probably not exist, let alone our rich capitalist society.
      drwong
      • The problem is this

        The problem is that when something is used as ad-delivery mechanism then primary function that you are interested in could be lost. For example can you imagine disconnected device running android? Hell no. How can anyone send ads to device that is not connected to the network? Maybe google can tolerate few devices like that but significant movement towards devices like this would force google do something to stop it.
        Want offline maps? If there are no companies that provide offline maps because everybody is using "free" online ones then offline maps would be gone. Good luck then if you get lost somewhere without "ad delivery network".

        I know that you can tune out all the ads and it is awesome but I worry that when ad is the primary reason for service to exist then in the end we as consumers lose. Then it does not matter what you want because if service cannot be used to deliver ads then it is pretty much DOA.
        paul2011
    • @paul2011 Sounds like they've gone the way of google, and beyond

      "With one search, consumers can look for information across the web, DEVICE, apps and cloud...Bing Ads will be an integral part of this new Windows 8.1 Smart Search experience...We will look to continue to innovate with Bing Ads"

      http://advertise.bingads.microsoft.com/en-us/blogpost/127536/bing-ads-blog/new-search-ad-experiences-within-windows-81

      I have not used windows 8.1 so I have no experience with this, but I'm not liking the sound of the direction they are headed. Now if they give away windows, then I might be ok with it, but I still won't use windows 8 unless my employer buys it. They have said windows 7 was the last windows we'd buy.
      drwong
  • Change

    Some people are resistant to change. It can't be prevented though. The Microsoft era is over. There is just too much negative in all the ways they cling to the past, trying to restore their former glory.
    symbolset