Even without the cloud component, it probably makes sense. All of Microsoft's competitors are offering free OS upgrades, which leaves Microsoft in an awkward position. They certainly won't lose their dominant market position overnight, but they would increasingly be seen as the laggard because of consumers and businesses who refuse to update due to cost. If they follow through with the OS as a subscription model, it will also help if everyone has the base OS that supports that model.

As much as I dislike Microsoft, I don't envy their position. Apple has revenue streams from their hardware sales as well as online software and media stores. Linux is supported by volunteer developers as well as commercial hardware and software vendors that base their software on Linux. Android is supported by Google's other products, which fits well since Android is a platform for Google's other products. Yet Microsoft is the odd one out since their revenues are, by in large, a product of software licensing.