Satya Nadella Knows The Power Of Free

| About: Microsoft Corporation (MSFT)

I was not surprised when I saw the rumors of a free limited feature version of Windows being kicked around at Microsoft (NASDAQ:MSFT). New Microsoft CEO Satya Nadella has a history of giving away quality software while leading the Server and Tools group at Microsoft, and he has successfully battled open source competitors using this strategy for years.

Server and Tools Segment Performance (in millions)
2008 2009 2010 2011 2012 2013
Revenue $13,195 $14,191 $14,866 $16,559 $18,534 $20,281
Operating Income $4,149 $4,803 $5,491 $6,105 $7,235 $8,164

Source: Microsoft 2013 10K

Microsoft's flagship database product, SQL Server, has offered a free version to compete with other free databases such as MySql and a variety of open source databases. The free version, SQL Server Express, has upper limits of 10gb databases and can spread processing across 4 computer cores. This is plenty of power to run many small business applications. Nadella's bet is to get companies started on this platform, and as the business grows the licensing fees go up correspondingly.

Mr. Nadella's Server and Tools group also offers a richly featured free version of Visual Studio (Visual Studio Express), the software developers use to write software for the Microsoft platform. Many businesses can use the free version and build applications for the Microsoft .NET ecosystem, thus integrating Microsoft into the DNA of the corporation. Once a corporation has applications built in .NET and integrated with SQL Server, it is expensive for corporations to switch platforms. Mr. Nadella has successfully bet that corporations will eventually pay for what they use.

Even Microsoft's cloud services platform, Azure, has opened itself up to supporting an increasing array of open source software. This is a bid to draw more developers to Azure, at the risk of reduced licensing fees.

Bill Gates, who recently returned to Microsoft as the CEO's 'technology advisor' also is not adverse to free software. Internet Explorer was born as a result of Netscape Navigator being the browser of choice in the mid 1990s, and integrating that into Windows for free help Windows dominate Internet browsing for the next 10 years.

This "Freemium" strategy fits into the growing trend of "bring your own device" - where employees are increasingly setting the direction for corporate hardware and software platforms. Give the software to consumers and developers, and make them be the ones to integrate what they know into the corporation.

So if the rumors of a free version of Windows is true, can a free limited feature of Office or Office 365 be on its way? It would make a nice gateway to get people integrated with Microsoft's cloud offerings. For the first time in four years I am long Microsoft. My bet is Microsoft will embrace the "Freemium" software licensing model in order to increase market share across Microsoft products, and Satya Nadella seems like a guy that can orchestrate it.

Disclosure: I am long MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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