Apple CEO Tim Cook and his executives had a lot of announcements at their Oct. 22 event in San Francisco, the biggest of which was probably the unveiling of the new iPad and iPad Mini. But the crew also revealed something that could radically alter one of the tech industry’s most fundamental business models: some of Apple’s most prominent software products—the latest versions of Mac OS X, iWork and iLife—will be given away for free with purchase of a new Mac or iOS device.
Cook positioned this zero-cost software as a game-changing development: “We are turning the industry on its ear.” That’s a bit of executive-suite hyperbole, considering how a great number of tech companies—most notably Google—already give away cloud-based software for free, with the production costs subsidized by advertising (Google also gives Android, its mobile OS, to manufacturers at no cost). But Apple’s new position will likely apply even more pressure to Microsoft and any other firms that sell productivity software and operating systems for money.
Apple’s logic in slashing prices seems pretty straightforward: the company makes the substantial bulk of its revenue and profits off selling hardware such as iPads and iPhones; if free software gives potential customers another reason to shell out a few hundred dollars for a device, so much the better. (The premium that customers pay for Apple products also likely covers the company’s development costs.) And by giving away the Mac OS X “Mavericks” upgrade to anyone who purchased a Mac desktop or laptop within the past couple years, Apple can ensure that millions of customers upgrade to the latest software—which is much better for updates, security, and just keeping the overall ecosystem nice and tidy.
If that wasn’t enough of an impetus, making its software zero-cost also allows Apple to stick a thumb deep in Microsoft’s eye. Microsoft still depends on sales of operating systems and productivity software to fuel its bottom line; although the company has made some moves toward becoming more of a “devices and services company,” those efforts are miniscule in comparison with the sales and revenue generated from its traditional software businesses. With the exception of the Xbox, which has finally started to generate significant returns after several years of running deeply in the red, Microsoft’s in-house devices such as Zune and Surface have generally failed to attract consumers in significant numbers.
By pushing a “zero-cost software” model, Apple could pressure Microsoft to slash prices for its own software—and unlike Apple, Microsoft doesn’t have a burgeoning hardware business to replace lost software dollars. For smaller makers of productivity software, the results could be more catastrophic—why would a consumer pay cash for a music-creation or word processing app when they could get the same things for free with their next MacBook upgrade?
That’s not to say that Apple’s struck Microsoft any sort of mortal wound. But as Microsoft CEO Steve Ballmer heads out the door, and his company attempts to regain the initiative in the consumer sphere after years of quiet stagnation, its rival in Cupertino just made things that much more complicated.