Microsoft is gunning for lower-cost products -- and good for them. The biggest area of growth across the next decade are the "next billion" connected in developing markets. Clearly, there's a strategy here and hopefully it won't get subsumed by short term Wall Street demands.
This week, Microsoft announced at its Build 2014 conference it was providing Windows for free to hardware partners for Windows Phones and tables smaller than 9 inches in size. It puts the software giant in parity with Android's relative costs after, oh, anywhere from five to seven years of "free" distribution, but more importantly recognizes the concept of "razors and blades" when it comes to devices and services.
Free "razors" in this case are mobile devices, while the "blades" are subscriptions to cloud services. In developed markets, Microsoft will be able to use lower-cost devices to effectively on-ramp new customers into an ecosystem of Office 365 subscriptions, storage, Skype, and other services. Given the turnover rate for handsets in any particular market due to drops, breakage, or just "obsolete," Microsoft has a steady opportunity to gain market share.
But it is the "next billion" where Microsoft needs to get in early and often. You won't see Apple there; the margins are too thin and it is more content to be the snobby, high-end product rather than offering handsets and tablets for "the rest of us." Facebook and Google are all over the map, between lowering the cost of bandwidth and opening up new ways to delivery bandwidth, streamlining software, and in Google's case working on modular phone hardware.
It wouldn't surprise me if Skype lead the charge on recurring revenues in developing markets. Voice communication , despite all of the rah-rah of texting, still plays a key role when people want to get things done. A Microsoft phone, manufactured by its Nokia division, can provide Skype on the device as a part of a bundle. Local carriers make money from data traffic, Skype helps to generate more data across the network, everyone gets recurring revenue and everyone is happy.
Microsoft also played the "Internet of Things" (IoT) card this week, demonstrating a version of Windows running on an Intel processor the size of a pencil eraser. Windows for IoT devices will be free -- which in some respects will be overkill for most Machine to Machine (M2M) applications. The important part once again is the razors and blades strategy, where Microsoft can give away the operating system and collect money from support and cloud services.
IoT needs places to collect, aggregate, and process data. Microsoft's established position in the enterprise gives it an advantage when it will offer IoT services built around Windows-based devices. And such services will be no doubt heavily subscription based, bringing in still more monthly recurring revenue.
Making Windows free for developing markets and IoT demonstrates Microsoft actually is working a plan to move out of one-off software sales and into a wider portfolio of service offerings. Don't be surprised to see the company widen its portfolio of cloud offerings in the months and years to come.
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