Press reports said Microsoft has clinched a deal with a number of Indian phone companies to produce affordable Windows Phone devices.

Microsoft was said to have agreed to a demand that the Windows Phone OS be offered without the usual licensing fee, essentially giving away its smartphone OS for free. The company, however, refused to comment saying it does not discuss confidential licensing terms.

This shift to free OS means that Microsoft will lose the Windows licensing revenues that account for a large part of its business. Analysts, however, believe the move is inevitable since Microsoft risks becoming irrelevant in the mobile marketplace dominated by Apple's iOS and Google's Android. Microsoft currently demands that handset makers pay licensing fees for Windows Phone.

Despite the lost revenues, Microsoft can use Windows Phone and its other operating systems to boost the popularity of its online services such as Bing, that have the potential to make more money from advertising

Microsoft offered its Windows Phone OS only in 2010, making it the laggard behind Apple's iOS and Google's Android. Former CEO Steve Ballmer noted with regret that Microsoft would have "a stronger position in the phone market today if I could redo the last 10 years." 

Microsoft's Windows Phone OS currently owns less than a 10 percent share of India's smartphone market, said research firm IDC. This makes Microsoft's move to provide its OS for free a calculated but risky gamble.

Microsoft will also have to contend with mounting competition from Firefox and Linux's Ubuntu, which are both free OSes.

The company also seems to be looking at the larger competitive picture. It cut licensing fees for sub-$250 PCs and seems to be considering lowering licensing fees for larger devices like tablets.

IDC forecasts that Microsoft's share of the smartphone market will increase in the coming years given its small current base.