Microsoft's Windows business model is far from dead

Microsoft's Windows business model is far from dead

Summary: Giving away Windows free to OEMs to load onto desktop and notebook PCs might seem like a good idea on the face of it, but in reality it's not necessary, and even if Microsoft were to do it, it's unlikely that it would do anything to overall PC sales.

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Tech pundits seem to love to dress up in voodoo costumes and point the bone at things. Some days it seems that every other headline is predicting the "death of this" or the "death of that." I think it's driven partly by laziness and partly by a God complex where we feel the need to be in control of things (whenever I've resorted to it, it has always been the latter reason).

Last week it was the turn of Microsoft's business model to die. Writing for USA Today, Motley Fool's Sam Mattera could hear the bell tolling for the Redmond giant's Windows business model.

"The days of charging for an operating system are effectively at an end," wrote Mattera. "With Android, and some extent Chrome OS, Google has forced Microsoft to fundamentally alter its business model. For most of its history, Microsoft's business was built around selling Windows licenses — those days are over."

Sure, this is an interesting idea, and I'm surprised that Mattera didn't point out that Apple has also delivered a few blows to Microsoft's business model by first dramatically reducing the price of OS X updates, and then making them completely free.

Windows is now the only major operating system where there is a tangible cost to the end user, both when they buy it as part of a PC, and then when they upgrade it. So it makes sense for Microsoft to follow suit and slash the price to $0.

Or does it?

On the face of it, the idea is solid. Microsoft gives Windows to the OEMs, OEMs pass those savings onto the end users, the end user saves money on new PCs, and Microsoft makes its money back through users making use of ad-supported services such as Bing and so on.

But there are a few problems with this plan.

  1. Microsoft is the dominant operating system on desktop and notebook PCs. In fact, since Apple's OS X is an ecosystem of its own, and Linux is essentially a non-starter in the arena.
  2. People don't seem to want to switch. PC users have had the opportunity to switch to OS X or Linux for years, yet the numbers suggest that more than 90 percent of PCs are powered by Windows.
  3. Giving away Windows for tablets that are under nine inches doesn't affect Microsoft revenues because that market is a drop in the ocean. PCs are a different matter. Back in the fourth quarter of 2013 Windows was generating about a fifth of Microsoft's revenue and a sixth of its operating income.
  4. The prices of PCs have been falling since PCs came out, and PCs are now cheaper than ever. How is slashing prices further going to make that much of a difference?
  5. Why would PC OEMs pass on all the savings to buyers? That segment's been feeling the squeeze for years, and rather than pass on the savings, the OEMs might just keep the cash.
  6. Even if OEMs did pass on all the savings to buyers, this just accelerates the race to the bottom where none of the OEMs can make money from PCs.
  7. Declining PC sales have more to do with smartphones and tablets being available then they do with PC prices.
  8. Microsoft is making money out of old OS rope. Look at Windows XP and how it can squeeze millions from companies who want to grant it a stay of execution. Sure, the money is a drop on the ocean, but that money is still being generated by an operating system that should be dead and buried by now.

So, while it's a nice idea, it's neither necessary nor is it one that is likely to rejuvenate PC sales. All it would mean would be fractionally cheaper PCs and Microsoft having to adapt to an entirely new — and as far as it is concerned, unproven — business model.

Topics: Microsoft, Software, Windows

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  • Microsoft need to start setting the PC quality bar again

    Before the DoJ intervention requiring uniform Windows pricing (with an exception for volume discounts), Microsoft charged different prices for Windows, depending on how well PC makers supported the Windows ecosystem -- including branding, but also how well they tested their hardware with Windows, I think whether they included crapware, etc. The first post-DoJ Windows release was Vista, and although it had many problems of its own, the lack of testing by PC makers and proliferation of performance-sapping crapware was very evident.

    With the DoJ mandate for uniform Windows pricing having expired (I think), Microsoft should go back to the old model. PC makers who produce attractive, high quality, innovative, crapware-free products, including especially products targeted at markets where Windows is weak (tablets, phones), should be charged low or zero prices for Windows licences -- even on traditional PCs (if they're good enough). Those who produce rubbish, don't test it, install a lot of crapware, etc. should be charged high prices (in some cases very high). It's the only way to give PC makers incentives to produce high quality hardware and invest in testing it, like Apple do. With uniform Windows prices, it's simply a race to the bottom to see who can produce the cheapest, least tested, most crapware-infected devices.

    I don't know if Microsoft still use uniform prices for Windows, and I suppose there's a risk of more complaints to the DoJ if they go back to the old model, but with Microsoft clearly non-dominant in tablets and mobile, they could at least use variable pricing there -- where it matters most.

    Charging zero for all small tablets and phones might be a good idea for gaining market share, especially since Android adds patent licensing costs, but to really gain share, I think Windows devices need to be better than Android. Microsoft need to have devices that can compete with Apple. Even if the OS is better and cheaper than Android, if the hardware is the same old crap, it will be hard to attract users, because cheap crap all looks the same.
    WilErz
    • Good Points

      And an idea that would be nice to see
      Boothy_p
    • MS: fix your store app pricing, and go after Google

      One very major problem with Windows 8, is the pricing of apps. If Windows 8 apps cannot have pricing that is comparable to what is present on the desktop, the OS is a non-starter for ISVs. The following link shows the pricing of Windows desktop apps on Amazon:

      http://www.amazon.com/design-download-business-education-software/b?ie=UTF8&node=229534

      Contrast this to apps in the Windows app store averaging close to $2.99. I've seen a really great CAD app selling for about $18 in the app store. This app would probably sell for hundreds of dollars on Amazon, if it was a desktop app. The situation is absolutely horrible.

      Microsoft needs to get a task force charged with making the Windows app store economically feasible for developers. If Microsoft is not able to sell any of its own software in the Windows app store, and make any serious money directly from it, why does it think ISVs will take it seriously? Microsoft needs great innovative apps in its Windows 8 app store, to really drive uptake of Windows 8, particularly on more expensive PCs.

      Also, why does MS allow Google to use antitrust tactics to floor software prices? Microsoft should use PR, and should be rallying regulators, software associations, and software developers in general, to go after Google, whose actions threaten their businesses. How can it ever be fashionable or cool for Google to use its ad business to repeatedly wipe out money making opportunities in different software segments? If Google is not stopped, it could seriously undermine the Windows ecosystem, and all the parties that make money in that system.
      P. Douglas
      • Subscription model

        The solution for high-value apps might be a subscription model, with price discrimination -- high prices for business users, low prices for non-commercial users and very low prices for students. You could say Office 365 is a trial balloon for that approach, and piracy would be much harder than under the traditional model of prepackaged distribution.

        Most apps for iOS and Android are very-low-value-added, or have a business model based on content. That won't work for most productivity apps, but it's hard to convince people pay high up-front costs. Moreover, software has moved towards continuous development. The old model of viewing software as a product that's produced and sold doesn't make sense any more. It's become more like a continuously provided service, and so a subscription model makes the most sense.

        I agree that Google's tactics are a problem. They fund all of their services via search/advertising revenue, where they have a clearly dominant position, and they tie other services to their dominant search/advertising business. It's obviously anticompetitive. Whether there should be intervention or not is a more complex question. I'm sceptical.

        If Google are left to leverage their dominance in web/mobile advertising, Microsoft to leverage their dominant position in PC operating systems, Apple to leverage their dominant position in tablets and Amazon to leverage their dominant position in online sales (Samsung and Intel also have dominance in some markets, to some degree), then they can all sort of balance out by cross-subsidising services where they aren't dominant, putting pressure on the dominant competitors. With that sort of competition, intervention would probably be unnecessary.

        The trouble is, the only real challenge to Google's key search/advertising business -- the one that subsidises all the others -- comes from Microsoft, and Microsoft suffered from politically motivated intervention by the DoJ, which prevented them tying their own search/advertising business to other products. They were effectively competing with one hand tied behind their back. Now that the DoJ restraints have expired, and Microsoft clearly lack dominance in tablets and mobile, they should be given free reign to tie their advertising business to Windows on PCs, tablets, phones, etc. That would offset Google's tactics in tying their software/services to their search/advertising business.

        One of the highest priorities for Microsoft's new CEO should be to make sure competition authorities understand that tablets and even mobile phones compete with PCs, and that a proper market definition includes all of them. If that market definition is accepted, then Microsoft's so-called 'Windows monopoly' can be seen for the illusion it is, leaving no reason to block bundling/tying by Microsoft.
        WilErz
        • Google should not be allowed to behave illegally

          "Most apps for iOS and Android are very-low-value-added, or have a business model based on content. That won't work for most productivity apps, but it's hard to convince people pay high up-front costs. Moreover, software has moved towards continuous development. The old model of viewing software as a product that's produced and sold doesn't make sense any more. It's become more like a continuously provided service, and so a subscription model makes the most sense."

          People are actually reasonably paying up front costs for desktop apps, as shown in the Amazon link below:

          http://www.amazon.com/design-download-business-education-software/b?ie=UTF8&node=229534

          Most of the purchasers are probably businesses and professionals. So then it becomes a matter of bringing the psychology of acceptance present in the desktop world, to the Windows 8 app store. I'm all for providing the option for users to choose to pay the up front costs of software, along with upgrades, or for users to subscribe to software and its supporting services. I believe both options typically would be best for developers, as a significant amount of power users, and people who are inclined to purchase sofware at reasonable prices, would not go for software subscriptions.

          Google's actions are not a theoretical problem. They are very real; because they lead to the curtailing of innovation and business opportunities in the areas of the different markets it affects. Take for instance mobile operating systems. Google has foreclosed on opportunities for all but the largest computer companies to compete. Virtually no one besides the big three (MS, Apple, and Google) can economically innovate, create jobs, grow their businesses in this software segment anymore. Google, for all intents and purposes, has created a no man's land of economic opportunity in this market segment. Why on earth should Google get away with this? Why isn't the law being enforced, preventing Google from doing this, so that there will be even greater economic opportunities for developers and software businesses? Then there is the halo effect Google's actions have on other software segments, creating adjacent no man's lands of economic opportunities for developers.

          Google's illegal actions in the mobile operating system market, has a lot of bearing of the price of software in the Windows 8 app store. I believe the effects of Google's actions on the Windows 8 app store, can be countered by having a regular store, along with a pro store, with minimum ($5 or higher) price levels. If businesses, professionals, and at least some individuals are paying for desktop apps, I believe they will also pay for good Windows 8 apps.

          In my opinion, MS should not just sit around and allow Google to use illegal behavior to unravel its Windows ecosystem. I believe MS should launch a PR campaign, showing up Google's illegal practices, how it affects jobs, taxes paid to the government, business opportunities etc., and get politicians up in arms over Google's behavior.
          P. Douglas
          • I mostly agree

            I more or less agree, but I think that if Microsoft have a free hand to compete against Google (as Apple and Google have to compete against each other and Microsoft), including tying products and services to the Windows desktop, blocking Google applications (e.g. Chrome) on Windows if they wish (e.g. because they fail to adhere to design guidelines), etc., then Google's search/advertising dominance could be challenged, potentially obviating need for intervention.

            I absolutely agree Google's actions are a violation of competition law -- more so than any of Microsoft's ever were, but solving such problems isn't straightforward. The previous DoJ (and to a lesser extent EC) intervention against Microsoft arguably played an important role in creating the current situation, and making it possible for Google to abuse their dominant position in web search/advertising. Another intervention, this time against Google instead of Microsoft, could reverse the problems the previous intervention against Microsoft created, but it could also make things even worse.

            Microsoft and others should continue to go after Google's repeated violations of IP (primarily patents), and collaborate to challenge Google's search/advertising dominance. In addition, competition authorities should absolutely forbid any further acquisitions by Google that might strengthen their dominant search/advertising position. Intervention might be necessary, but it should be a last resort.
            WilErz
        • Subscriptions are great - until you can't pay

          Pay once = you can use it for life, or until you choose to migrate to another platform.

          Subscription = keep paying every month or year and when you stop paying you're completely SOL.

          Subscriptions/leases are great for cars, software, and other items depending on use. Most businesses don't always see big profitable quarters and losing their ability to produce when the subscription is mandatory is not going to help the greater economy... if we want people working and competing, of course.
          HypnoToad72
    • Problem is they have to sell Windows machines

      first before they know if models are attractive, high quality, innovative, crapware-free products. Also alot of the problems that happen in windows are because of bad 3rd party drivers and software. When you can't print in Windows the average consumer rage is geared towards Microsoft and not HP or Epson.
      Orlbuckeye76
    • Interesting

      "Microsoft charged different prices for Windows, depending on how well PC makers supported the Windows ecosystem"

      Whether you mean "peer support" or "number of sales" influencing Microsoft's purported influencing of cost for PC OEMs before they were regulated... in a licensing OEM paradigm, isn't it more sensical to charge the same price across the board and let the OEMs convince customers that they are the best?

      In terms of peer support, that I'd readily speak up in favor of.

      Until Google replaced Android with Chrome (which, to my understanding, has no patent/licensing issues), Microsoft has a chance. And, TBH, their tiled GUI for phones is innovative, effective, and doesn't mimic the bog standard "icons on a grid" that iOS, Android, and Windows 3.0 all did in one form or another... :) On the desktop, the tiled Metro UI is something of a partial pain (and no Aero Glass :( ), but Windows 8 was otherwise an admittedly impressive release.
      HypnoToad72
  • And if

    The solution is not only software based but also hardware ?
    When you think about it there is quite a majority of Junk hardware in the PC market. Moreover the PC design has not really Evolved since a long time. Up to now there should have been some quite interesting offerings, even for niche market, such as PC with a default muti screen setup for developpers or other Professional needing several screens.
    Or a package with a laptop and at least one High Res/ hugue screen.
    Or again a multi screen offering ?
    Do you see any of this ?
    What about the hardware quality ?
    Almost all HP Laptop, we bought recently even for pro usage are Junk.
    timiteh
    • Hardware quality

      You'll probably only see an improvement in PC hardware quality if the suppliers of the two high-margin components, the OS (Microsoft) and the CPU (Intel), use variable pricing to reward producers of high quality products. The key question is whether or not competition authorities will allow them to do it (variable pricing was one of the things that got Microsoft into trouble in the 1990s). Unfortunately, competition authorities seem to focus on static analyses, which focus only on prices at a specific point in time, and ignore the benefits to consumers of platform innovation over time.
      WilErz
  • Windows needs to be more competitive in price and features ...

    to lessen the reason to go to Google, iPad, etc... An example. Windows 8.0 (8.1) does not have RDP/RDS (Remote Control) built into the base edition of full Windows 8.X. You have to go up to the next version. I can get FREE addon software that will let me do remote control of my Windows 8.X PC, but can't do it with built in products. Another example of Microsoft being a little TOO proud of some of it base functionality that people have come to expect in products. Microsoft needs to realize that Windows RT (or whatever they are calling it these days) is the LOW END product, not basic Windows.
    jkohut
    • sorry, should have said "You have to go up to the next Edition"

      to get RDP, not version.
      jkohut
  • All a result of a monopoly.

    And if they go back to their old way, they would again be in court for illegal practices.

    Only this time I don't think they would be able to prevent being broken up.
    jessepollard
    • Agreed

      Gates, Ballmer and MS behaved badly and now they are discovering they have few friends and frankly many who would love to see them die. It'so called karma and sometimes it's a drag.
      CornheadsBack
      • But those that truely matter don't want them to die

        it's only the ABMer's here that want to see that.
        William.Farrel
    • You give all the wrong entities all the wrong credit or due

      typical.
      William.Farrel
  • It's still $133 to buy if you don't already have it

    I built my own computer and although I run Linux I'd like to have Windows available for games and testing.

    It's not free or low cost if you don't already have a license. It's $133 for 8.1 full version. That's still too high. Microsoft should just give it away, not just for the OEM's, not just for the upgraders but for EVERYBODY.
    Doug0915
    • Microsoft is a software company.

      They have some of the best programmers in the world that demand higher compensation. Apple is a hardware company the writes their own OS. In fact legally you can't run a Apple OS on a windows machine but you can legally purchase Windows and run it on a Apple machine. The revenue from selling apple hardware is used to pay programmer and the revenue from selling Windows is used to pay Windows developers.
      Orlbuckeye76
    • Brilliant!

      Let's pour millions into R&D and give away the fruits.

      Unless as suggested earlier, MS is able to reap profits related to its OS from some other service, this is hardly a sustainable business strategy.

      A lot of armchair CEOs here seem to think it would be easy to adopt Google's search/ad revenue model, but conveniently forget that Google is _heavily_ entrenched. "Google" has, after all, become a verb in popular lexicon. It might be possible, but it ain't going to be easy or quick.

      For a company of its size and history, MS is evolving rather rapidly. It will never be fast enough or good enough for the vocal minority and its most rabid critics, but the vision and pace of change for a multi-billion dollar company with a such a long and storied history should impress.
      Nierteroth9