In the future, your computer will be a tablet with a free operating system, running free applications hosted in the cloud and built on ARMchips. How does that sound for the company that charges for OS and apps hosted locally on personal computers and built on Intel? It sounds like a new future is needed.

 

Enter Windows 8, Microsoft’s new OS and future-rewriter, which rolls out this year. It aims to work well on touch screens and tablets, be ARM-compatible, attract app developers and convince device makers to pay up. Microsoft’s “major announcement” tonight, expected to introduce the first Windows 8 tablet, is part of a huge effort to revive its most important product. After all, Windows accounts for more than a quarter of sales and a much bigger slice of profits, even in spite of recent margin declines due to higher product development costs.

 

The price Microsoft charges device makers for Windows 8 will be crucial. It might seem this battle is already lost, as one competitor in mobile, Google’s Android, is free. But, Bernstein Research says, licensing Windows 8 at about $40 a device could actually be cheaper for tablet makers that ship fewer than 9m units a year because of fixed costs that come along with Android – software integration and support costs, as well as royalties for the parts of Android that depend on Microsoft’s intellectual property.

 

Microsoft will not be content to sell just the OS. It will want to sell Office software too, but the price the whole package must command leaves some profit for the tablet maker. Morgan Stanley estimates that, assuming Windows tablets sell at a slight discount to the iPad and that component costs are a 10th higher (due to lack of scale), Microsoft could charge up to $50 or so for the bundle and still leave the manufacturer with a respectable 7 per cent margin.

 

This is broadly comparable to what Microsoft charges PC makers now. The maths works. Hopefully, the product will too