Microsoft May Be Giving Away Its Mobile Software For Free, Just Like Google

Efrati says Microsoft is in talks with Sony to start selling a Windows-based mobile phone in 2014. He says it's also in talks with Chinese handset maker ZTE.

Microsoft wants as many partners as possible to ramp up distribution and grab market share points.

To lure new partners to Microsoft's platform, Efrati says it is tweaking its business model for Windows Phone.

In the past, Microsoft would charge $10-$20 per handset, notes Efrati. Now, it's willing to charge a company nothing for "first several hundred thousand handsets sold and fee of just several dollars per handset after that," says Efrati citing a source familiar with Microsoft's negotiations.

Microsoft can afford to do this, in part, because it makes a lot of money from patent royalties on Android phone sales. Nomura estimates Microsoft rakes in $2 billion annually, almost all profit.

Money aside, Microsoft has no choice but to adapt. It's getting smoked by Google, and there's no reason for a handset maker to pay a premium for an operating system that consumers have totally ignored. Especially when the price of smartphones, even off-contract are drifting towards $100.