Microsoft's Windows business model is far from dead

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.
Written by Adrian Kingsley-Hughes, Senior Contributing Editor

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.

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