Microsoft Revamps OneDrive Storage Tiers

Today Microsoft announced some very substantial changes to OneDrive storage. OneDrive is of course Microsoft’s consumer cloud storage product, formerly named SkyDrive. When the service first launched in 2007, early users received 5 GB of onli…

Reducing Bill Of Materials – Windows 8.1 With Bing

Traditionally, Microsoft has been a dominant force in the computing landscape, and with that domination it has cultured partnerships with many companies to have them build PCs based on Windows. Practically every computing device sold came pre-installed with the current version of Microsoft’s operating system, with the price of the OS factored into the overall cost of the device being sold. People wanted PCs, and those PCs were running Windows, so the partnership flourished. The only real competition came from Apple, but Apple was not interested in the tight margins created by the stiff competition for the lower cost PC, and Windows was left to monopolize the market.

Several major changes occurred over the course of the last several years which have certainly impacted overall Windows license sales – the meteoric rise of Android being the most powerful one, but another major shift was Microsoft changing its position as a seller of software to that of a hardware maker, directly competing with its long established partners. Microsoft of course had one major advantage over its partners in that it didn’t need to factor the cost of Windows into the Bill of Materials (BOM). This has certainly been a factor in the recent move by every single OEM which traditionally focused on Windows devices to broaden their efforts and begin providing devices based on competing operating systems – namely Android and Chrome OS.

Both Android and Chrome OS are free, which means a lower BOM, and inevitably a lower device MSRP.

This is certainly not the first time Windows has had to compete against a free operating system. Linux, while powerful, has struggled to gain any traction in the consumer OS space, but briefly with the beginnings of netbooks Linux was installed as the OS. Microsoft quickly countered that with a lower cost version of Windows XP for devices categorized as netbooks, which quickly dominated that market as well.

But this time is not like the rise of netbooks. Android is a powerful platform, with a multitude of apps available, meaning people actively seek it out, rather than settle on what came with the netbook. Chrome OS too, while certainly more limited in scope than Windows, is a polished OS which is being constantly updated. Many people who simply require a device to go online, and maybe perform some basic tasks, don’t need or want the complexity of Windows. Also, the low system requirements for both Android and Chome OS, as well as the free nature of the operating systems has allowed OEMs to manufacture devices for less, and therefore sell them for less than a comparable PC. Lower prices obviously drive sales, and it’s worked.

At Microsoft’s developer conference BUILD, a new update to Windows 8.1 was announced. One of the goals was to lower the BOM for Windows devices by reducing the required memory to 1 GB, and reducing the required storage to 16 GB. Also, it was announced that Windows (including Windows Phone) would be free for all devices with a screen size of less than 9”. Clearly the goal was to compete directly with the low cost Android devices that were becoming ubiquitous in the market. Today it was discussed on the Windows Experience Blog that a new OEM only Stock-Keeping Unit (SKU) of Windows would be available called Windows 8.1 with Bing.

Now, before you get concerned with the name, it won’t be marketed to end users as Windows 8.1 with Bing – it’s just the name of the SKU. The only change between this SKU and the standard Core SKU of Windows 8.1 is that Bing must be the default search engine in Internet Explorer. End users can of course still change the default search engine to whatever they like, so really the only change here is a requirement on OEMs for initial setup.

But how were the system requirements lowered?

To get to 1 GB of memory space as a minimum, the app store frameworks were refined, and the process lifetime manager is more aggressively suspending apps, as opposed to killing them. This is tweaking existing processes to make them more efficient, but the bigger story is how the storage requirement was dropped from 32 GB to 16 GB. The answer here is an entirely new way to run Windows directly off of a compressed WIM file, in a system known as WIMBoot.

Previous to Windows 8.1 Update, an installation of Windows actually included two copies of Windows – one compressed version for recovery, and once again in the uncompressed form which is the files Windows runs on. Clearly this isn’t the most efficient way to run a system with a limited amount of storage, and one of the first tips for anyone with a 32 GB Windows device is to move the recovery image from the internal storage to an external USB drive. A standard Windows partition layout would have looked like this:

With new devices based on 8.1 Update, Microsoft has taken the opposite approach with WIMBoot – rather than remove the recovery partition, remove the uncompressed files and run directly off of the image file. In the place of the uncompressed files are a set of pointer files which point back to the compressed install file called install.wim. Also included are the Windows RE recovery tools, stored as winre.wim, and an OEM specific custom.wim file. This leaves a partition layout of this:

The custom.wim file allows an OEM to quickly update images, by just replacing the custom.wim file. This file is for final customizations such as Windows updates, build-to order apps and drivers, and other requirements of the OEM.

If an end user does a refresh on their device, the pointer files for the install.wim and custom.wim file are reset, making this a much faster operation than before.

The end result is a significant reduction in the amount of space Windows requires.

WIMBoot is available for all versions of Windows – x86, x64, and ARM, but it does require UEFI as well as solid state drives or eMMC. Traditional hard drives, or hybrid drives, are not supported likely due to performance.

It’s unclear if there is any performance loss or gain from running on the WIM file rather than uncompressed files, but it’s certainly something I’d like to test. If the performance hit is small, it would be surprising if WIMBoot doesn’t expand past the low cost devices to cover the entire range.

With these changes, Microsoft is hoping to kickstart a resurgence of Windows devices at the low end of the market. With the lower BOM, OEMs should be able to be price competitive with Android and Chrome OS now, but with a Windows experience.

Microsoft Q3 2014 Financial Results

This afternoon Microsoft held an earnings call to announce the results of their third quarter for fiscal year 2014.

Overall GAAP revenue was down less than 1% over Q3 2013 at $20.403B, with Non-GAAP revenue up 8% due to Windows Upgrades, Office Deferral, and Video Game Deferral last year bringing down the Non-GAAP revenue last year.

GAAP Gross Margin also fell 8% at $14.462B as compared to $15.702B last year, but Non-GAAP was up 3% due to the same deferrals.

Operating income was down 8% as well year over year, and Earnings Per Share were down 6% at $0.68 per share.

In the Devices and Consumer lines, Windows OEM revenue was up 4%, mostly driven by a 19% increase in Windows OEM Pro which was attributed to Business PC growth likely due to the retirement of Windows XP. Non-Pro revenue was down 15% for the quarter, with China accounting for 6% of that total.

Office Consumer revenue was up 15% for the quarter. This refers to the full license of Office, and not the subscription based Office 365 Home.

Even with the increases in revenue, Gross Margin was down about 1% year over year for this group.

On the consumer hardware side, there was a large revenue gain of 41%, with Xbox platform revenue up 45%. 1.2 million Xbox One consoles, and 800,000 Xbox 360s were sold in the quarter. Surface revenue was also up more than 50% with Surface revenue now at almost $500 million for the quarter however no actual device sales numbers were announced.

Once again, even though revenue was up, Gross Margin was down 34% which was attributed to the increase in Xbox One console sales and their high BoM.

The final piece of the Devices and Consumer group is the aptly named “Other” category, which includes Office 365 Home, Bing, and Xbox Live revenues. This group was up 18% in revenue over Q3 2013 driven by strong subscriptions for Office 365 Home – now at 4.4 million subscribers and up 1 million for the quarter. Bing search advertising revenue was also up 38%, and Xbox Live revenue was up 17% contributing to the strong increase for this business segment, and unlike the other Consumer lines, Gross Margin was also up 26%.

On the Commercial side, Microsoft announced a 7% increase in revenue and 6% increase in Gross Margin which came from a slight increase in Commercial Licensing at 3%, and a 31% increase in the cloud services of Office 365 and Azure which had 100% and 150% revenue gains for the quarter. Microsoft’s commercial cloud services fall into the Commercial “other” category.

*note – Q3 2013 data not available due to company reorganization

Also in commercial, Microsoft announced that around 90% of enterprise desktops worldwide are now running Windows 7 or 8 which is impressive considering how many were running XP not very long ago.

Corporate Vice President and CFO Amy Hood also stated that the Nokia acquisition will close Friday April 25 which was four months later than they initially expected. Once completed, all of Nokia’s assets will fall under the Devices and Consumer lines, with license and platform payments falling under the D&C Licensing, and Nokia Devices and Services falling under D&C Hardware.

Overall, strong results in the Commercial segment and great demand for Microsoft cloud services such as Office 365 and Azure were not enough to overcome the consumer segments with Xbox One and Surface margins pulling down the overall result. Xbox One sales are obviously razor thin on margins at the moment which is not unexpected in a new console, and Surface sales are still very low. Next quarter should be interesting to see how the Nokia acquisition fits in, and to see if any headway can be made in the Consumer Hardware segment.