The real reason Microsoft is offering Windows 10 for free

Microsoft (MSFT) has been clear that it wants Windows 10, the latest version of its flagship operating system, to be very different from Windows 8, decried by some critics as a flop. Along with returning a version of the Start button and not forcing people to use a touch screen, the company is offering Windows 10 free of charge be free for at least for a year after it's released for anyone running Windows 7, 8 or 8.1.

Windows has traditionally been one of the main revenue streams for Microsoft, raising the question of how it can afford to give away a main product. There are two explanations. One is that it can't afford not to give it away. Google (GOOG) has made some serious inroads into Microsoft's business by offering its Android and Chrome platforms for free. That puts pressure on Microsoft to bring consumers back into the fold.

Second, Microsoft has an end-run strategy: make money through additional services, as the company mentioned last December. Additional details were promised and they are starting to come out, with a marketing strategy developed for Windows 8.1 likely to be kept for Windows 10.

Microsoft gave away Windows 8.1 licenses to machine manufacturers for free if used in a device with a screen smaller than 9 inches, and at a highly subsidized rate for larger screens so long as they used a version that included hooks into the company's Bing search engine. Revenue dropped but units out the door went up.

Just as important, advertising revenue from Bing and games helped bolster Microsoft's financial outlook. By contrast, over the last two years compound annual growth rate for Windows revenue was -16 percent. Add in the Bing and games money and it was only -1 percent. In other words, Bing and, to a lesser extent, games made up for what Microsoft wasn't making.

Microsoft looks poised to take the same approach with Windows 10. Once the new operating system debuts, the company will count on app sales to drive revenue. Windows 10 will run re-worked Android and iOS apps, which means there is a massive potential number of software packages that developers might like to have available on the many computers that will likely run the new Windows version.

But don't think Microsoft is getting touchy-feely. The software maker's chief operating office recently spoke about moving from one-time licensing fees to an "annuity conversion," meaning that the company may still be trying to figure out how to loop people, or at least corporations, into paying an annual fee.