About a year ago I chastised my colleague, Mike Wheatley, for suggesting in a story on SiliconANGLE that Microsoft should open-source Windows. That’s crazy, I said. Windows is a $20 billion revenue stream for Microsoft, and it would never abandon a business that big.

Now it appears that Mike was on the right track. Microsoft has recently been floating the possibility of open-sourcing its flagship operating system and has said it will give away Windows 10 to anyone who has bought a PC within the last six years (which is 70% of the market). I expect future versions of Windows will also be free, or will carry at most a nominal charge. Open sourcing is a natural next step.

Microsoft’s strategy isn’t a capitulation but rather a recognition that the world has changed. Nearly all applications can now be delivered as a service, and it’s only a matter of time until the need for local installation vanishes. The operating system is evolving to become little more than a delivery system for applications. Google knows that, and that’s why Chrome and Android are so critical to its future.

Microsoft has a much bigger opportunity in using Windows as a delivery vehicle than selling it as a package. Its success with Office 365 has been an eye-opener. Microsoft CFO Amy Hood was recently quoted saying that buyers of Office 365 spend nearly twice as much over the lifetime of the application as buyers of the packaged version. But Microsoft’s opportunity is far greater than selling word processing and spreadsheets as a service.

Out-Googling Google

Google has done a nice job of building a business based upon understanding what people search for and what they keep in their Google apps. Microsoft has the potential to out-Google Google. With Windows, it can understand everything a user does on a desktop or a mobile device, including the applications they use, the files they keep and even other devices on the local network. It can use that knowledge to sell services, advertising – which is still a pretty good business when targeted appropriately – as well as commissions on other product sales.

Windows 8 offers a preview of that opportunity. It seamlessly integrates Microsoft’s media, app and game stores into the Windows player. In the future, you can see Microsoft selling promotional placements to third-party software providers and taking a cut of the sale.

I did a back-of-the-envelope audit of the SaaS services I or my clients pay for, including TripIt Pro, HootSuite, Google Drive, Office 365, Flickr, Evernote, Netflix, Slack and a couple of news services. The total quickly came to more than $500 per year, and I’m not a particularly heavy user of paid SaaS apps. If Microsoft got even 10% of that total, it would easily exceed any revenue opportunity from Windows. And I suspect that it can do a lot better than 10%.

I expect that rather than becoming entirely free, Windows will evolve as a freemium model. There will be a base level OS that Microsoft gives away and premium versions aimed at IT organizations and power users. The challenge will be to acquire the biggest possible market share, and there will be plenty of competition for that, but Microsoft has a good head start.

So I owe Mike an apology. It turns out he was more prescient that I was. And Microsoft CEO Satya Nadella (above) deserves credit for realizing that the strategy that got Microsoft to where it is isn’t the one that will take it to the next level.

Photo via Microsoft Ignite on Facebook