Critics Debate: Windows Phone 7 Fee or For Free?

Microsoft has been recently criticized for suggesting that it may charge phone companies to use its newly-unveiled mobile operating system, Windows Phone 7 (previously known as Windows Mobile 7). However, other analysts argue that charging for the operating system is both reasonable and sensible.

The charge was led by the Business Insider website, where a columnist estimated that Microsoft's annual revenue from licensing the Windows Phone 7 system will be around $300 million. That's clearly no trifling sum, as Dan Frommer argues, but it's a tiny part of Microsoft's annual income of around $66 billion.

Frommer's article on to depict a range of possible outcomes, with total revenue from the mobile system varying from $62.5 million to $750 million depending on the license fee charged and the number of sales.

No License Lowers Costs, Grows Market Share

Frommer believes Microsoft would get much better value by giving away the system without charge. Why? For one, it would get the system on far more handsets and allow manufacturers and networks to keep prices lower. In turn, that would boost Microsoft's market share and allow it to make more money from the sale of applications.

It could also secure higher advertising rates for the mobile edition of Bing, which would be the default search option on Windows Phone 7. (Source: businessinsider.com)

License Fee May Have Little Impact on Cost

David Coursey of PCWorld takes issues with those arguments, stating that even a company the size of Microsoft shouldn't be throwing away hundreds of millions of dollars. He argues that Microsoft will have already done the calculations and wouldn't charge if it didn't consider a more profitable option. (Source: pcworld.com)

The article also notes that Microsoft is in a unique position among mobile operating systems: two major rivals (Nokia's Symbian and Google's Android) offer their systems without charge on an open-source basis, while two others (Apple and Research In Motion, the latter producers of the BlackBerry) make their own handsets and don't license their full systems.

Another point in favor of charging is that a license fee in the expected $8 to $15 range makes very little proportional difference to the manufacturing cost of a handset. And once the network subsidy is applied, that cost difference may disappear completely: most phones are marketed at specific price points such as $99 or $149 (or even free of charge), and it's perfectly normal for two handsets with differing production costs to have the same retail price.