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

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.
Written by Mary Jo Foley, Senior Contributing Editor on

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

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. 

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