REUTERS/Robert Galbraith

Microsoft CEO Satya Nadella speaks during his keynote address at the company’s “build” conference in San Francisco, California April 2, 2014

Microsoft is giving away Windows to any existing customers for free until July 26, 2016.

This is a dramatic shift from how previous versions of Windows have worked. Beyond this, it has also had a big effect on how Microsoft’s finances work.

Giving away the operating system for free seems like it makes no sense. Traditionally, Microsoft has made money by selling Windows (or, as an extension, Office) to consumers and businesses. Now, it just sells Windows to businesses and gives it away to consumers.

The reasoning behind this is simple, and has been articulated by Microsoft many times: Windows on one billion devices.

Getting Windows 10 onto one billion devices — roughly the same number as Apple has on iOS — is tough. Windows is a computer operating system, not a phone operating system. This was great when PCs ruled, but that is no longer true.

However, the PC market is still massive — around 270 million units per year — and Microsoft has a good chance of getting Windows 10 onto one billion devices. But to do it, the company had to make a compromise and give it away for free.

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REUTERS/Jason Redmond

Microsoft Corp shareholders drink coffee as they wait to hear Chief Executive Satya Nadella speak at his first annual shareholders’ meeting in Bellevue, Washington December 3, 2014

Drastic times call for drastic measures

To make that decision — which was likely the idea of CEO Satya Nadella — possible, Microsoft has had to invent new lines of revenue.

Office 365, for example, works better when a lot of people use it because it’s subscription-based. Instead of getting a one-time fee — usually around $100 (£70) per copy — Microsoft now gets $5.99 (£5.99) every month which, in a little over a year, generates more money than the old model.

This change means that Microsoft has had to look for different ways to monetise Windows. The Windows Store is one example of this and, according to Microsoft, it’s becoming a hit (annoyed developers aside).

Microsoft needs the most amount of people to use the Windows Store to make it viable. Apple’s App Store, which is worth tens of billions of dollars a year, is valuable because one billion people have access to it.

Apple recently announced its holiday quarter results and made a big deal out of its “Services” division which, in essence, was the App Store. According to Apple, its services business is worth $31 billion (£22 billion) per year.

Microsoft wants to get some of that $31 billion — or, more accurately, create its own — and giving away Windows is a key part of that mission because the more people you have using your operating system, the more money you can make from it.

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