Microsoft’s dilemma is clear: It makes billions of dollars off its storied Windows operating system, a legend in building a business on a computing platform.

Yet it is besieged everywhere by competitors who give away operating systems, like Google with Android, or package them into hardware, like Apple with its Macs, iPhones, and iPads. It also faces a host of new, cheap, Internet-connected devices are running on non-Windows operating systems, which are typically open source and hence free of charge.

On Wednesday morning, in San Francisco at its Build conference for developers, Microsoft unveiled its response: It’s making Windows free. Sort of.

A Very PC Tax

Not on PCs, its historic moneymaker. But Windows will be free for Internet-connected devices, a move that Microsoft accidentally telegraphed by unveiling a website for Windows On Devices on Tuesday.

Windows will also be free for smartphones and tablets with screen sizes smaller than 9 inches, a move that reserves larger tablets—which can substitute for desktop PCs or laptops—as devices Microsoft will still charge for.

So how will Microsoft make money? The company seems to be betting that it will make money by hosting data and code on its Azure cloud services, selling apps like its Office suite, and also offering its own hardware through its pending acquisition of Nokia.

The move seems to put longtime partners like Dell and HP, which must still pay a Windows tax on PC desktops and laptops, at a disadvantage. But it also seems inevitable.

Photo of Microsoft executive Joe Belfiore dancing on a Windows-powered piano by Owen Thomas for ReadWrite