NEW YORK (TheStreet) -- Microsoft (MSFT - Get Report) may be nearing a free Windows 8 release if recent rumors are true. "Windows 8.1 with Bing" is an upcoming free version that Microsoft may be targeting at current manufacturers now installing Google's (GOOG - Get Report) Chrome.

A free scaled-down version of Windows does follow a recent pattern to position Microsoft software on a level playing field with Google's myriad of free offerings. A few weeks ago, Microsoft announced several new budget-priced hardware partners in Asia including ZTE, Gionee, Longcheer, and Xolo. Microsoft also stated that Windows Phone 8.1 will allow the phone makers to operate Windows 8.1 on current Qualcomm (QCOM - Get Report) powered Android hardware.

In order to effectively compete against a free Android operating system in the budget arena, Microsoft must sell Windows Phone software incredibly cheap or give it away for free, and that's precisely what some are saying Microsoft intends to do. The upside to handing out free copies of operating systems is it allows for greater revenue and profit through app sales that would otherwise go to Google. Another key objective is to enable Microsoft to maintain, and hopefully build, the critical mass needed for its ecosystem to remain viable. Not everyone thinks Microsoft can pull it off.

TheStreet's Rocco Pendola believes Google and Apple will put Microsoft out of business within 10 years. I don't share Pendola's pessimism and actually think Microsoft is a strong candidate for investors wanting to buy and hold for dividend income.

That said, Microsoft is taking the gloves off to defend its territory from further erosion. Google's overall game plan to migrate users from Microsoft is easy to articulate. Offer services that are almost as good or in some cases better than Microsoft's and give it away for free.

Microsoft rumored plans to offer a free watered-down Windows 8 doesn't mean it has acquiesced to giving away a full blown version. The company does recognize a $50 copy of Windows is a hard sell on a $200 retail tablet and is now offering low-cost device manufacturers the ability to receive a discount in order for Windows to directly compete with Chrome in the budget space. Time will tell if a reduction to $15 is low enough to have an impact. Microsoft hasn't made much of an impact in search, Google's cash cow.

The strategy centerpiece and core business of course is Google search, and for my money, it's the best and only search engine to use. Google also makes it easy for users to advertise and post ads from its network. Easy ad buying and adding inventory is a key feature that enabled monetization of epic proportions for Google's search engine.

Microsoft has met Google tit-for-tat with online office suite software, though. It introduced Office Live and OneDrive (previously called Skydrive) in response to Google Apps. Microsoft also has Azure, a cloud offering I think is superior in capabilities and ease of use compared to Google's cloud.

In short, Microsoft is no longer blowing off Google's exploits as irrelevant and while long overdue, is finally taking a serious look in the mirror to discover it aggressively needs to compete to stay relevant. Pendola doesn't think it can, but I do.

For Google investors, the low-hanging fruit appears to have been picked, and another doubling in share price over the next year similar to last year is doubtful. I don't necessarily feel Google's stock has peaked, but I'm not convinced the potential reward justifies the risk. Looking at the chart, it's practically a straight line up. Of course, that was equally true when it crossed above $1,100, and it's now north of $1,200.

I haven't entered into a Microsoft long or Google short position, but I'm monitoring both closely for entries.

At the time of publication, Weinstein had no positions in securities mentioned.

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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.