Why Microsoft Stock Will Get a Spark from Windows 10 (MSFT)

Wall Street celebrated the official launch of Windows 10 today (Wednesday) by adding 2.25% to Microsoft stock.

MSFT stock closed Wednesday at $46.37.

Think of that as a first installment on the benefit that Windows 10 will deliver to Microsoft Corp. (Nasdaq: MSFT) stock over the next few years.

To some investors, it might seem odd to view Windows 10 as a significant catalyst to MSFT stock.

microsoft stockAfter all, isn't the company giving it away for free?

Yes. And that's the genius of it.

To its credit, Microsoft realized the old Windows business model had run its course. Releasing a new version of Windows every few years doesn't make nearly as much money when the PC market is shrinking as it did when it was exploding in the 1990s.

A change in strategy was called for. So Microsoft started giving Windows away on mobile devices, and now it's a free upgrade to those with PCs running Windows 7 or Windows 8.

The new way to monetize Windows, hinted at last year, has gradually become clearer.

Last December we got the first real hints of what Microsoft had mind.

At the Credit Suisse Technology Conference, Microsoft Chief Operating Officer Kevin Turner said that with Windows 10, there'd be "additional opportunities for us to bring additional services to the product and do it in a creative way."

Microsoft already has an array of free and paid services, most notably Office 365 subscriptions, its cloud-based storage offering OneDrive, and Skype.

That makes Windows 10 something of a Trojan horse. The idea is to get customers into the ecosystem at little or no cost so you can sell them other products and services.

That term "ecosystem" sounds familiar, doesn't it? It should, because Apple Inc. (Nasdaq: AAPL) has leveraged its ecosystem to grow into the biggest company on the planet.

And that's really the heart of Microsoft's Windows 10 monetization strategy...

How Windows 10 Will Feed the Rise of Microsoft Stock

"If you look what Apple advertises on TV, at least in the U.S., it's all iPhone and iPad, and yet you see all the lines that connect their ecosystem," Microsoft Marketing Chief Chris Capossela said at the company's Convergence conference in March. "So they can focus their marketing dollars on a very small number of things, be very disciplined, but because they've engineered their things to work together, one product naturally leads to the next product without any marketing at all. Very efficient marketing to build your marketing into your products."

Microsoft already has a lot of related products, but until now they haven't necessarily integrated that well, particularly from the perspective of driving sales. Windows 10 is designed to change that.

For one thing, Windows 10 will unite all types of hardware. Apps that can run on a Surface tablet will run on a Windows PC as well as a Windows smartphone.

That also means they'll share other features of Windows 10 such as Cortana, Microsoft's Siri-like voice assistant.

"If you use Cortana, you're actually becoming a Bing user," Capossela said. "This is a way I can build Bing into every Windows phone, into every Windows 10 PC."

The Bing search engine has slowly been gaining market share and making more money. In its most recent quarter, CEO Satya Nadella said Bing would finally start turning a profit in 2016. Channeling more Windows 10 users in Bing's direction is a shrewd strategy.

But over time we'll see Microsoft monetize Windows 10 in a variety of clever ways.

Microsoft Solitaire As a New Revenue Stream

The best illustration of that is the Windows 10 version of the venerable Microsoft Solitaire collection. The "freemium" version includes ads for other products and services. To get rid of the ads (and get some in-game perks), it will cost you $1.49 a month, or $9.99 a year.

So if just 10 million users out of the billions who will end up running Windows 10 opt to pay for this "premium" version of Solitaire, Microsoft gets about $100 million in almost pure profit. Pretty slick.

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And it suggests that the possibilities for monetizing Windows 10 are endless.

Combined with other promising Microsoft strategies, such as moving customers to Office 365 subscriptions and the growth of its cloud businesses, Windows 10 will help make Microsoft stock a winner again.

Money Morning Capital Wave Strategist Shah Gilani believes MSFT investors just need to be patient.

"This is absolutely a long-term play," Gilani said. He expects MSFT stock to reach the $60 to $65 range by the end of 2016.

Follow me on Twitter @DavidGZeiler.

A Microsoft dividend hike: In addition to strong growth prospects, Microsoft stock also has a 2.7% dividend yield. And better still, Microsoft has a habit of raising its dividend. It's pretty much a given that we'll see a Microsoft dividend hike in September. But how big the boost will be - that's the key question now...

About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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