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Microsoft reveals the accounting trick that made Windows 10 a free upgrade

Image Credit: WinBeta

For those still arguing about the validity of Microsoft’s claims of free upgrades to Windows 10 for older OS users, you can stop now. Windows 10 is free. However, free Windows 10 is not an upgrade, but more of an accounting trick. To be more specific, Microsoft is saying that the upgrade is not an upgrade but rather, “it’s a marketing and promotional activity.” This mastery of the legal jargon is done purposely and with great caution on Microsoft’s end. Just last week Microsoft gave information regarding the company’s first quarter financial results. In doing so, Microsoft issued a 10-Q filing with the U.S. Securities and Exchange Commission, aka, the SEC.

In the SEC filing, Microsoft goes through great pains to semantically differentiate between the ‘update’ of Windows 8.1 and the ‘upgrade’ of Windows 10. ComputerWorld, noticed the following from the filing:

“This offer differs from historical offers preceding the launch of new versions of Windows as it is being made available for free to existing users in addition to new customers after the offer announcement. We evaluated the nature and accounting treatment of the Windows 10 offer and determined that it represents a marketing and promotional activity, in part because the offer is being made available for free to existing users [emphasis added]. As this is marketing, and promotional activity, revenue recognition of new sales of Windows 8 will continue to be recognized as delivered.”

Image Credit: WinBeta

On the other hand, Microsoft defined Windows 8.1 as an ‘update’ for similar, but not exact, financial reasons. The free ‘update’ of Windows 8.1 came with a steep deferment of $1.1 billion (US) that spread across three-quarters. The update to Windows 8.1 was only made available to the 250 million or so users of Windows 8. With potentially a pool of Windows 7, 8, and 8.1 reaching into the hundredths of millions, Microsoft would like to avoid a much larger deferment for Windows 10.

What does any of this mean?

Labeling the windows 10 upgrade as “marketing and promotional activity,” helped Microsoft prevent revenue deferrals. This marketing move also kept Microsoft from having to put away money for the sales of Windows in January, when the upgrade was first announced in back in January . This level of semantic wizardry left Microsoft free to report minimal revenue drops as opposed to the more realistic plummets the company would have had to for their first quarter earnings. In short, the difference between the word upgrade and update could have cost Microsoft in after hour and day after trading of the company’s stock. Investors made predictions based on the history of Microsoft’s previous revenue streams. In the January reveal of Windows 10, Microsoft changed those revenue numbers by changing the streams, but still relied on investors who maintain those previous predictions. Had the predictions been wildly inaccurate, Microsoft’s stock may have appeared too volatile for investors to stay engaged while Microsoft established their footing in new and stronger revenuer ventures.

Semantics aside, end users of Windows 7, 8, and 8.1 can expect an upgrade to their machines OS, free of charge. How Microsoft plans to report next years earnings or adjust the free ‘upgrade’ lingo after the promotional period is over, is still being held behind cryptic legal jargon in Redmond.  

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