Microsoft can't afford to make Windows free. It is one of 2 profit centers, and if profits tank, their stock will tank faster.
I disagree. They're willing to sacrifice their stock ([link|http://quicktake.morningstar.com/Stock/StockPerformance.asp?Country=USA&Symbol=MSFT&stocktab=charts|recall] (taking account of splits, etc.,) it's gone from a peak of ~ $60 at the end of 1999 to $27 now. The stock's bascially been flat since the last half of 2000.).
Microsoft's all about control. If giving away Windows or Office helps them keep control they'll do it in a heartbeat, IMO.
How would it do that? By lessening the takeup of unencumbered alternatives and by making it even more difficult for suppliers of free software to make a living. Couple that with MS's proprietary stuff like XBox, their patents, their push into telephony, music, movie distribution, their rumored interest in AOL, etc., and they could very well decide that they need to sacrifice the oldsters to help maintain their power over the industry.
Note that they already dramatically cut the price of Windows to developing countries if they think it's necessary to compete with Linux.
I think IE's a good example of what they're willing to do to fight competition. They've got a big war chest so they can afford to have some lean years. Gates' latest "leaked" [link|http://media3.washingtonpost.com/wp-dyn/content/article/2005/11/08/AR2005110801735.html|memo] sounds an awful lot like the earlier memo he put out before killing Netscape...
But we'll see.
Cheers,
Scott.