Microsoft will give away licenses to Windows Phone and Windows to device makers building smartphones or tablets with screens smaller than 9-in. measured diagonally.
"In my view, this is one of the boldest moves Microsoft has made in recent memory" said Al Gillen, an analyst with IDC, in an interview after today's three-hour keynote at Microsoft's Build developers conference. "It's pretty powerful."
"This is a very big deal," agreed Carolina Milanesi, strategic insight director of Kantar Worldpanel ComTech. "It's a change at how they look at their cash cow, looking at the bigger picture now and what they need to do to win the mobile story, if you like."
Others echoed the "wow" factor of Microsoft's unprecedented decision, characterizing it as a major milestone in the company's 38-year history.
"It's the day Microsoft finally capitulated to the changing market driven by the disruption led by Apple, Google and the smartphone ecosystem," said Patrick Moorhead, principal analyst at Moor Insights & Strategy, in an email interview.
Terry Myerson, the Microsoft executive who heads the firm's operating systems engineering group, made the surprise announcement at Build, which opened Wednesday and runs through Friday in San Francisco.
"We want to get this platform out there," Myerson told the audience, composed primarily of developers. "We want to remove all friction. To drive adoption of your applications, on phones and tablets less than 9-in., we are making Windows available for zero dollars."
The freeing of Windows on smaller devices -- although small is relative, since many smartphones boast screens of around 5-in. -- was in line with earlier moves, including the lowering of system requirements to fit on less-expensive hardware with minimal amounts of system memory and storage space, as well as reports last month that the company was slashing licensing prices for some devices by 70%.
Even so, it marks a sea change.
"While I don't see this as a last-ditch effort to get traction with Windows in the mobile market, it's getting closer," Moorhead contended. "Microsoft has very low mindshare in phones and tablets and no mindshare in wearables, so the free operating system, simply put, was a requirement."
"This helps level the playing field," said Gillen, referring to Windows and Google's Android.
Microsoft has adopted a strategy strikingly similar to that of its arch rival, which essentially gives away its Android mobile operating system, a key reason why Android now powers the majority of new devices shipped each month.
"This was absolutely key if they wanted to make any difference in mobile," said Milanesi. "It's what they needed to do in a market where they are competing with Android."
It also marked Microsoft's flat-out admission that it could not make money in using its decades-old business model of selling licenses to OEMs (original equipment manufacturers) and ODMs (original device manufacturers), but had to hunt for a new revenue generator, which it has described as "devices and services."
However, there's little immediate financial risk, said Milanesi, who noted that Microsoft was actually putting small amounts on the bottom line from Windows licensing to smartphone and tablet ODMs and OEMs.
"On the phone side, Microsoft wasn't really [generating] revenue," Milanesi said. "The money was very minimal, and most of that was coming from Nokia. With Nokia becoming part of the [Microsoft] business, that was going to go away. And on the tablet side, with how they were incentivizing, there wasn't much money there either."
Revenue has also been puny because Windows has struggled to climb out of the single-digit shipment share cellar. In the December quarter, researcher IDC pegged Windows' share of smartphone shipments at just 3%.
Rather than rely on licensing revenue, Microsoft will need to leverage customers by showing them ads or selling them services, with Office its single best shot there for the moment.
"In the context of Microsoft's 'devices and services' strategy, free operating systems facilitate increased sales of services and hardware," noted Moorhead. "With increased hardware volume comes a larger market which attracts developers to the Windows platform."
Milanesi described Microsoft's revenue strategy differently. "It lets them get users, especially emerging market users, on a Windows phone," she said. "It may get those users away from the other ecosystems, it may not lose them to start with."
And as it entices more people into the Windows ecosystem, Microsoft will have a better shot at keeping them, hoping to make money off those customers in the future through sales of PCs -- which, though in decline, aren't going to vanish, Milanesi argued -- as well as current and future services.
"They're going after a Google model," said Milanesi. "They're saying, 'We just want to be in people's hands.'"
Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is gkeizer@computerworld.com.
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