Analysts believe Microsoft won’t dare charge for this year’s update to Windows 8, but one is certain it will for future annual releases

Sometime in the coming weeks, Microsoft will tell Windows 8 users whether they will have to pay for the upgrade code-named “Blue,” and if so, how much.

While Microsoft remains tight-lipped on the subject, analysts believe Microsoft won’t charge for Blue, but may do so for later updates.

“I don’t think that in the current Windows 8 climate they can charge for the first update, as the perception of many users will be that any changes being made or features they are adding will make Windows 8 the way it should have been when they first purchased it,” said Michael Cherry of Directions on Microsoft. “I know I’d be upset if Microsoft asked me to pay for this set of changes.”

Brett Waldman, an analyst with IDC, agreed. “I find it hard to believe that Microsoft would try to monetize Windows Blue,” he said. “In my mind, it’s more like a service pack-plus-feature pack, which have always been included with the purchase of a license.”
Last week, Windows division CFO Tami Reller — who leads the group along with Julie Larson-Green, head of development — said that the company would share pricing information and other details, including packaging, in the next couple of weeks. Reller spoke to several media outlets and bloggers, including Mary Jo Foley, who blogs on ZDNet, as part of a PR blitz.

But as is Microsoft’s habit, Reller declined to share more than that.

Analysts stepped in to fill the gap.

All those contacted by Computerworld believed that Microsoft will not charge for Windows Blue, which Reller and Green referred to simply as “the next update for Windows,” but which leaked copies of early builds identified as “Windows 8.1.”

“They would be walking a tightrope giving away Blue for free, and be setting a precedent, but with a new technology that’s controversial, I think they’ll give this one away,” said Michael Silver, an analyst with Gartner.

Windows Blue is not only the code name for the update, but also an umbrella term for Microsoft’s switch to a faster release schedule that is to deliver annual changes to Windows. That’s a major transformation for the Redmond, Wash. developer, which has generally produced a new version of Windows every three years.

The new development and release pace means that earlier conventions may not apply. As Waldman noted, Microsoft has historically issued “service packs,” largely collections of previously-issued bug fixes, for free. Prior to Windows 2000, the company also shipped what it called “feature packs” that included new functionality, also for free. The latter term has fallen into disuse, with the exception of some special updates, like those that restore Media Player to EU and Korean editions, which must be shipped minus that program as part of past antitrust actions.

But Windows Blue will be neither fish or fowl, neither service pack nor feature pack, at least by nomenclature and probably by content. Microsoft has certainly made it sound like Blue will be a big deal, far more than a series of bug fixes or a few new features.

“It will deliver the latest new innovations across an increasingly broad array of form factors of all sizes, display, battery life and performance, while creating new opportunities for our ecosystem,” Reller said in a Q&A posted to a company blog. “It will provide more options for businesses, and give consumers more options for work and play.”

The expected contents of Blue, but more importantly, the switch to a faster release tempo, have given rise to thinking that Microsoft could charge for these annual updates. The company must certainly have considered monetizing Blue.

Windows revenue has been threatened by a long-running and severe slump in PC sales — IDC estimated computer shipments were down 14% in the first quarter compared to the same period the year before — caused by a shift in consumer dollars once spent on PCs to tablets and smartphones, a lengthening refresh cycle and lackluster reaction to Windows 8.

A regular update cadence, and income from those updates, would make up for some of the revenue shortfall. It would also allow Microsoft to trumpet those updates to enterprises that pay for Software Assurance (SA), an annuity-like program that provides, among other benefits, rights to free upgrades to future versions of Windows in return for additional payments.

But updates would only be a benefit for SA subscribers, and thus a carrot for new and existing customers, if those same updates came at a cost to everyone else.

Several of the experts compared Windows Blue — the annual update strategy — to Apple’s also-annual upgrades to OS X. If Apple can charge for those incremental upgrades — $20 the last two years — Microsoft should be able to charge for Blue and its successors, they reasoned.

But customers will get a free pass this time, the analysts said, citing several reasons.

Daryl Ullman, co-founder and managing director of the Emerset Consulting Group, which specializes in helping companies negotiate software licensing deals, knocked down the idea of Microsoft charging for Blue in order to pitch it as a benefit to companies that pay for SA on Windows.

“Under SA, companies would be eligible for Blue, just like any other upgrade,” said Ullman. “But there’s no value in that to them now. Of our clients with SA, none of them has done anything with Windows 8. And even if they had, they’re not going to touch the desktop just months after [migrating to Windows 8]. Organizations just do not like to touch the desktop. Once every three to five years is enough, because it’s a major happening.”

Others echoed Cherry, noting that Microsoft would likely get an earful if it charged for Blue. “I do agree that any form of monetization is likely to see some pushback in the industry,” said Al Gillen of IDC.

But while optimistic that Microsoft will skip the charge this time, Cherry was also sure that Microsoft would eventually put a price on the annual updates.

“First, and strategically, I think Microsoft would like to charge for such updates in the future,” Cherry said. “However, before they could do so, I also think they have to determine several things, including: How much are users willing to pay for an annual update; how much value, in other words new features, they can put in each update; and finally, can they prove that they can roll out updates with value in a consistent and predictable cadence.”

Supporting his take that Microsoft will charge for updates — if not for 2013’s Blue — Cherry pointed out that neither Reller and Larson-Green had a name for the impending update, which will reach customers as a public preview in late June during the BUILD developers conference.

That omission could be telling, Cherry said. “I’m not sure they’ll expose a number for the update, but will just call it ‘the Windows 8 update,’” he said. “There would still be a number [assigned to the update] that could be checked programmatically for support, but I don’t think they want to get into the whole problem of the public name.”

If that is Microsoft’s strategy, it would have an impact on the free versus paid question for updates. “If [Blue] works, then we might not see another big version,” Cherry said. “Suppose this release, let’s call it 8.1, is a success. Next year, 8.2 is a success. In my mind that means we may never see a big release, call it Windows 9, but rather, just annual updates that everybody buys and everybody installs.”

With years between something called “Windows 8” and “Windows 9” — or nothing called the latter — Microsoft would be much more likely to charge for the annual updates as a way to replace the revenue lost by ditching the major upgrades of the past, Cherry argued.

Cherry was the only analyst willing to put a possible price tag on the updates. “My expectation would be that when Microsoft begins charging, the price for an annual update would be somewhere between $24.99 and $49.99,” he said.

That range straddles the Windows 8 Pro $39.99 upgrade price Microsoft offered through Jan. 31, 2013, and the amount Apple charged for the 2009 OS X upgrade to Snow Leopard in 2009. But it’s above the fees for upgrades to Lion and Mountain Lion in 2011 and 2012.

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