MSFT Stock Would Move if Windows 10 Includes This One Change

Whatever the validity of Microsoft's grandiose claims for the next version of Windows, one major feature could have big implications for MSFT stock.

Microsoft unveiled Windows 10 on Tuesday at a special event in San Francisco.

"Windows 10 represents the first step in a whole new generation of Windows," gushed Terry Myerson, executive vice president of Microsoft's operating systems group. The new version will be such a massive leap over the current Windows 8, he explained, that Microsoft felt compelled to skip past Windows 9.

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Customers ultimately will decide whether Windows 10 is a flop like Windows 8 and Vista or an enduring success like Windows XP and Windows 7; the new version goes on sale sometime next year.

To be sure, consumer reaction will affect the sales of Windows 10, which will have a direct impact on Microsoft stock.

But many suspect that a possible change to the way the software is sold - something Microsoft declined to discuss on Tuesday - could have a much more lasting impact on MSFT stock...

MSFT's Windows 10 Catch

Microsoft is very likely to introduce a subscription pricing model when it officially launches Windows 10, fundamentally changing how customers purchase its flagship product.

Most people buy a copy Windows indirectly when they buy a new PC. The software is pre-installed, with the PC manufacturer having already paid the licensing fee to Microsoft. It's what's called a "perpetual license" - good for the life of the PC.

The only time such a customer would pay for Windows is if he bought a new version of Windows as an upgrade.

Under a subscription model, a copy of Windows would still be pre-installed on a new PC, but the customer would have to pay Microsoft a monthly or annual fee to keep it active.

The fee would be modest, with the possibility that certain advanced features would cost a little more.

That might sound like a rip-off at first, but it can benefit the customer as well as Microsoft...

How a Subscription Can Be Good for MSFT Stock - And You

The benefits to Microsoft are fairly obvious.

Switching Windows 10 customers to a subscription model provides the company with a steady, dependable revenue stream and erases the uncertainty that would surround a major version release in the past.

Vista and Windows 8 taught Microsoft the harsh lesson that customers will avoid a Windows upgrade that gets a bad reputation. That not only costs the company sales but adds to compatibility headaches as users cling to outdated versions.

Such behavior forces Microsoft to support aging Windows versions for years, which diverts software engineers away from new products and innovations. And once Microsoft stops supporting a version - which means no more regular security patches - customers still using it become vulnerable to malware.

That's what happened with Windows XP. Even today, 13 years and three major versions of Windows after its release - and five months after Microsoft ended support for it - Windows XP is running on more than one in four of the world's PCs.

With a subscription model, that doesn't happen. Customers, be they enterprise customers or individuals, get all product upgrades automatically as long as they remain current with their account.

That's good for Microsoft, of course, but benefits customers by providing a stream of new features, bug fixes, and improvements as well as ensuring they don't get left behind on an unsupported version.

Enterprise customers also get the benefit of being able to spread out the cost of the upgrades over time rather than having to come up with one large sum of money for each major upgrade.

That leaves us with the "Why now?" question.

MSFT Finally Stops Fighting Change

Under former CEO Steve Ballmer, Microsoft often appeared on the defensive, particularly with regard to its two cash cows, Windows and Office.

But since taking over in February, new CEO Satya Nadella has shown that he wants to embrace, rather than fight, the changes to how consumers buy and use technology.

That has meant doing things like making Office available for the iPad. And it has meant a willingness to experiment with how the company sells its products.

"In a world of ubiquitous computing we want Windows to be ubiquitous," Nadella said at the April earning conference call. "And that doesn't mean one price and one business model on all that."

Microsoft has already implemented a subscription pricing model for other products, chiefly Office 360 and other cloud-based offerings. Extending the subscription model to Windows would be the logical next step, particularly given the success it has had with Office 360.

In the past two quarters, Microsoft has reported dramatic increases in its Office 360 subscriber base - more than 1 million in the June quarter alone - which brought the total to 5.6 million users.

More impressive is that Office 360 subscriptions helped drive a 147% increase in commercial cloud revenue in the company's fiscal fourth quarter, to a $4.4 billion annual run rate.

Expect Microsoft to offer several pricing tiers for both consumers and business customers, similar to how it sells Windows now, but as subscriptions. The company may continue to offer a "permanent license" version as well, but incentives and pricing will be geared to push customers toward subscriptions.

That's what Microsoft has been doing with Office, and the strategy has succeeded even beyond the company's expectations.

The arrival of Windows 10 is the perfect opportunity for Microsoft to launch a subscription pricing model for Windows. If Nadella manages it properly, this move can generate the core of a subscriber base that will drive revenue - and MSFT stock - for years to come.

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UP NEXT: As much as a subscription model would help Microsoft stock, the company has been creating a much broader foundation for success. Here's why the MSFT comeback has only just begun...

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