You may think that there's little difference between the words "upgrade" and "update", but in the arcane world of financial regulations the two terms have very different, and very important, distinctions. That's the reason Microsoft is officially using the "update" term for Windows 8.1, rather than it being an "upgrade" for Windows 8.
In the past, Microsoft has released what it called "service packs" for previous versions of Windows for free, but those packs were mostly for putting in performance improvements and bug fixes to the OS, with only a few minor features included in each pack. Windows 8.1, on the surface, does not fit the description of a service pack as it adds many new features to Windows 8.
However, Microsoft offered the reasons why Windows 8.1 is just a free update, rather than an upgrade, to Windows 8 in its newest filing this week to the U.S Securities and Exchange Commission:
Windows 8.1 will enable new hardware, further the integration with other Microsoft services and address customer issues with Windows 8, and will be provided to Windows 8 customers when available at no additional charge.
Even though Microsoft is promoting Windows 8.1 with a list of its new features, including being able to boot to the desktop UI, the addition of a Start button, new in-house Windows 8 apps, better customization of the Start screen and more Snap view options for apps, the company is telling the SEC that Windows 8.1 is a mere "update".
This affects Microsoft in two ways. One is that they don't have to charge current Windows 8 users for Windows 8.1, as Apple does with its yearly upgrades for Mac OS X. The other is that by putting the "update" label on Windows 8.1, Microsoft does not have to defer any revenues for the Windows division, which could cause some major hits to the company's financial books.
So, as Microsoft itself stated to the SEC, "We evaluated Windows 8.1 and determined that it did not meet the definition of an upgrade and thus have not deferred revenue related to this planned release." Problem solved. It's possible that Microsoft could continue to "update" Windows 8 with new features in yearly doses until it is ready for a major overhaul of the OS in the future.