Microsoft takes on the 'free' OS

The company is inching toward offering its Windows Phone operating system gratis in some markets. Does that portend big changes in Microsoft's strategy? A longtime Microsoft analyst weighs in.

Microsoft is taking baby steps toward offering its operating system for free or on the cheap -- a necessary tactic in a world dominated by Google's Android and other up-and-coming free operating systems, an analyst tells ,

As reported by the Times of India this week, Microsoft had been in negotiations with Indian phone companies to "produce affordable Windows Phone devices" since last year.

The agreement was "clinched" when Microsoft agreed to offer the Windows Phone OS sans the usual licensing fee, according to the Times. Microsoft said in a statement that it "cannot discuss confidential licensing terms."

"It's a calculated risk to see how it works," said Bob O'Donnell, principal analyst at Technical analysis Research. The Windows Phone OS has less than a 10 percent share of India's smartphone market, which is dominated by Android, according to IDC.

Microsoft fell behind Android and Apple when it missed the move to mobile, not offering the Windows Phone OS until 2010, long after Google and Apple jumped in the market. Former CEO Steve Ballmer said as much earlier this month. "We would have a stronger position in the phone market today if I could redo the last 10 years," he said, speaking in the UK.

The company has reason to be somewhat optimistic, however. IDC forecasts that its share of the smartphone market will only increase in the coming years.

To make this happen, emerging markets present a special challenge, where operating systems like Firefox and even Linux's Ubuntu -- both free -- could gain traction.

"There's a lot of potential in these markets for alternatives," O'Donnell said.

So, how will Microsoft compensate down the road if it relies less on Windows licensing revenues for consumer products, which still account for a large chunk of sales. "Increasingly we're going to see business models change anyway, with revenue generated by services added on top of the OS. So, this is a chance to get their foot in the door."

O'Donnell gave examples such as Office 365, Skydrive, Skype, and music services.

"If it does work well, I wouldn't be surprised to see them do it in other large markets," he added.

And Microsoft is rethinking licensing fees with larger devices too, like tablets. It has already lowered licensing fees for sub-$250 PCs, O'Donnell said.

That helps tablet makers like Dell sell its 32GB Venue 8 tablet for $229 or Lenovo offer its Miix 2 8-inch tablet for $249.

But baby steps is the operative phrase for Microsoft's rethink. "It's not going to happen overnight," O'Donnell said.