Microsoft (NASDAQ: MSFT) recently introduced Windows 11, which will be offered as a free upgrade for Windows 10 users later this year. This announcement probably surprised some investors, since Microsoft had previously called Windows 10 its “latest version” of Windows.
This statement was based on the transformation of Windows into a cloud-based service that could be continually updated online and monetized through its app store. Windows 11, although under a new name, actually marks the continuation of this strategy. Let’s see what this new OS means for Microsoft investors.
The profession of Windows
Windows is Microsoft’s best-known product, but the tech giant only generated 14% of its Windows division revenue in the last quarter. This segment is home to OEM and enterprise licenses, Windows cloud services, Internet of Things (IoT) services, patent licenses, and MSN advertisements.
Before Microsoft released Windows 10 as a free, limited-time upgrade in 2015, PC users had to purchase new versions of Windows every few years. But many consumers simply stuck with older versions of Windows, fragmenting the operating system and preventing Microsoft from launching unified upgrades and services. Microsoft has also wasted resources supporting outdated versions.
Satya Nadella, who became Microsoft’s third CEO in 2014, solved the problem by offering Windows 10 as a free operating system for consumers, like iOS and Android, and then monetizing it with an app store and other built-in features.
Microsoft continued to sell Windows 10 licenses to PC manufacturers and corporate customers, so the overall impact of Windows’ “temporary distribution” to consumers was not that great. Microsoft has also expanded its business in the cloud to reduce its overall dependence on Windows licenses.
Microsoft’s annual revenue increased from $ 86.8 billion to $ 143 billion between fiscal 2014 and 2020. But between these years, the weight of the Windows division on Microsoft’s revenue is dropped from 19% to 16% and continued to decline throughout fiscal 2021.
Why Windows 11 is a smart move for Microsoft
The overall financial significance of Windows licensing is fading, but it will still serve as the foundation for many of Microsoft’s cloud-based services and applications.
On the surface, Windows 11 provides a simpler interface than Windows 10 by streamlining some settings, eliminating some apps, and updating its visuals. But it also brings major changes under the hood.
Windows 11’s new Microsoft Store will be integrated directly into Amazon‘s (NASDAQ: AMZN) Android app store. Therefore, users can install both Windows apps and more than half a million Android apps. This integration, along with its improved touchscreen, voice commands and stylus functionality, could make the operating system more appealing to tablet users.
Windows 10 is also ditching Skype and promoting Teams as the default communication platform. This might sound odd, since Microsoft paid $ 8.5 billion for Skype in 2011, but getting everyone to Teams could eliminate persistent redundancies between the two services. Microsoft already integrated a lot of Skype’s business features into Teams in 2017, so the decision wasn’t all that surprising.
Windows 11 is also expected to be a more secure operating system than its predecessor, as it will only run on devices with a Trusted Platform Module (TPM) 2.0. A TPM is a chip that protects a PC against hardware attacks during startup, and it is required for some of the new security features in Windows 11.
Why Windows 11 Can Cause Microsoft Problems
However, the new hardware requirements of Windows 11 could cause many users to stick with Windows 10.
Many PCs shipped since the launch of Windows 10 still do not have a TPM. The minimum RAM and storage requirements for Windows 11 are also about double the minimum requirements for Windows 10. The edge believes that these higher requirements could leave “millions of PCs behind.” “
Microsoft plans to continue supporting Windows 10 until 2025, so it probably expects slow deployment as hardware catches up with its new software. It’s a smart long-term decision, but it could cause short-term fragmentation between Windows 10 and 11 users.
Was this the right decision for Microsoft?
Microsoft’s introduction of Windows 11 says its flagship operating system continues to evolve as a cloud-based service, will support new apps and features, and be more secure than its predecessor .
This is great news for the Windows business, but investors should take a closer look at Microsoft’s expanding commercial cloud business, which has been behind most of its growth in recent years. , instead of worrying about the technical details of its next upgrade to Windows 11..
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.