SAN FRANCISCO--Microsoft (NASDAQ:MSFT) is making Windows Phone, and Windows software for phones and tablets with screens of less than nine inches free for handset makers to use in their devices. The move represents a radical shift for Microsoft as it seeks to expand market share for devices running its software, especially Windows Phones.
The software giant disclosed the moves here at its Build developer's conference. "Microsoft is evolving its Windows business model to enable partners to offer lower-cost devices in the highly competitive smartphone, tablet and PC categories," the company said in a statement. "Microsoft will offer to hardware partners $0 Windows with services including a one-year subscription to Office 365."
Such a shift brings Microsoft more in line with Google's (NASDAQ:GOOG) business model for Android. Google gives away Android software to OEM and ODM partners, but makes money on advertising across its services and from users who pay to access services like cloud storage and music streaming.
It's unclear how much money Microsoft was making from its Windows Phone licensing fees. However, Microsoft's global smartphone market share is still miniscule compared with Android and Apple's (NASDAQ:AAPL) iOS--according to research firm Gartner, Microsoft only captured 3.2 percent of the global smartphone market in 2013. That was up from 2.5 percent in 2012.
"They are shifting their business model from monetizing software to monetizing services and hardware," Current Analysis analyst Avi Greengart said of Microsoft.
He said that Microsoft could still look to make money on intellectual property, or its cloud services like SkyDrive cloud storage, or via advertising through its Bing search engine. Additionally, getting greater market share for Windows Phones and Windows tablets could spur sales of Nokia's (NYSE:NOK) phones and Microsoft's Surface tablets.
However, Greengart said it's not entirely clear how all of that will play out. Further, Microsoft expects to close its deal for Nokia's devices and services unit this month, and afterward Microsoft will be directly competing with its Windows Phone OEM partners, Greengart said.
"It's really difficult to make money in software when one of your competitors (Google) gives it away for free and the other (Apple) is building it into a highly differentiated ecosystem that fuels high-priced hardware," he said.
Microsoft has long charged hardware makers a fee to install its Windows software into their devices. But the PC market continues to shrink as in the face of growing sales of tablets and phones. And the rise of Google's Android--which is free for device makers to use--represents a compelling alternative for manufacturing companies that previously paid for Microsoft's Windows platform.
The change in how Microsoft licenses its software builds upon announcements Microsoft made at Mobile World Congress in Barcelona in February around Windows Phone to make it easier for companies to make Windows Phone hardware. Microsoft said it added support for Qualcomm (NASDAQ:QCOM) Snapdragon 200 and 400 chipsets, which will power low-end and mid-range smartphones.
Further, Microsoft and Qualcomm are working to give OEMs and ODMs access to the Qualcomm Reference Design program for Snapdragon 200 and 400 processors, which they have said can make it quicker and easier to build Windows Phone devices. With the QRD program, software developers can connect with device makers through a "preferred vendor" list; hardware component vendors can have their parts tested by Qualcomm to be included in the QRD program; and, perhaps most importantly, OEMs can select from available development platforms and obtain schematics, board layouts, documentation and tools to design a QRD-based device. Qualcomm also assigns engineers to assist each customer.
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