How does Microsoft monetize Windows?

Microsoft has matured in how it thinks about monetizing Windows going forward. Historically Windows has been about OEM sales (basically OEM attach of windows to their PC′s), retail sales and annuity contracts that give some additional rights like downgrading to a lower version. So basically revenue was king.

Chris Capossela, Chief Marketing officer at the Citi Global technology conference Sept 8 (click here https://tinyurl.com/qyg4b3c for the video and here https://tinyurl.com/ntwgkhx for the transcript) says the following:

We've said within Windows 10 in two years we want to have a billion Windows 10 active devices connected to Windows 10, using Windows on a regular basis.  That gives you a sense that for us we care about revenue, profit, share, but we also care about usage. 

Fundamentally we have to be more focused on how many people are using our stuff every day and how happy they are using our stuff.  And if we get a lot of very happy people then the revenue, the profit, the share, we think that will follow.  So a core power metric for us is Windows 10 devices.  That's not a PC statement.  That will be phones, that will be tablets, that will be laptops, that will be desktops, that will be big Surface Hubs.  That will be Xboxes.

If you're a Windows 10 user, there are other things we care about.  It isn't just selling you a device that has a Windows license embedded in it, because if you're actively using the product we care about things like what kind of browser are you using, what's our share of our browser versus Google's browser, or versus Firefox.  So we've put a lot of work into Microsoft Edge, this new browser that comes with Windows 10, and we're seeing that Edge usage is higher on Windows 10 than IE usage was on Windows 8 and Windows 7.  That's net positive for Microsoft.  That's more queries being executed through Bing, that's more ad revenue flowing through Edge.  And that's obviously a revenue source for us post-sale of the Windows device.

Query share is another big one. We have invested heavily in Cortana, who is a personal digital assistant that's built into Windows 10, and she can help you do all sorts of different things, look up information, remind you of things, find things for you.  And as you use Cortana you're not using the Google query engine, you were probably using 15 minutes ago.  And the more people fall in love with Cortana and use Cortana the more we're able to essentially capture that query share from Google.

So it's not just about the Windows license, or the Windows device.  It's all of the things that people do on that device that we're able to do a better job with, with the newer version of Windows, and with new devices that we'll introduce with our partners.

So in addition to revenue and profit, share and usage are important and usage translates in to other ways of post-sale monetization like advertising revenue.

This of course has an impact on how Microsoft accounts for Windows 10. On June 26 Microsoft put up a PowerPoint presentation on the Microsoft/investor web page called Windows 10 revenue recognition (https://tinyurl.com/nawsgk8)

Microsoft: Windows as a service. With the launch of Windows 10, Microsoft will provide new features and functionality over time. We will continue to keep it current for the supported lifetime of the device. We think of Windows as a service-continuous updates over time with new innovations to help our customers be more productive and have more fun. We will have a new revenue recognition model because windows 10 will include software upgrades provided over time, rather than at a specifically prices software upgrade events, which will result in the deferral of revenue.

What this means is illustrated in the following graphic.

So a new PC with Windows installed from an OEM instead of being accounted for as a software sale the revenue will now be deferred over the lifetime of a device which Microsoft estimates can range from two to four years. Basically this means going from a software revenue model to a SaaS revenue model. However that does not always happen every day with a business with the size of Windows……

Disclosure: I am a Microsoft employee. I have no privileged access to roadmaps, technologies, strategies or financial information. This article has been written with the help of publicly available information. This article is not officially endorsed by Microsoft.