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The value of zero-priced software

Apple’s latest product launch (new OSX, iPads, Macs and iWork/iLife) came with a change in pricing for software. OS X and iWork and iLife and updates are now made available free on new Macs and, in the case of the suites, on iOS devices as well.

Recall also that iOS updates are now free as well and that OS X had been reduced in price from about $129 to $29 with Snow Leopard in August 2009 and to $19 with Mountain Lion in July 2012. The iSuites have also dropped in price over time so the pattern of evaporating software prices is long-running.

But how fast and what is the impact? The historic performance Apple’s Software business is not easily determined since it was always blended with additional businesses. Until September of last year, Software was reported as part of “Software and Services” and since then as part of “iTunes, Software and Services.” Some assumptions allow the following picture to be drawn:

Screen Shot 2013-10-24 at 10-24-5.07.03 PM

One additional wrinkle to the Apple software story is that OS X and iWork/iLife are not all the software titles available. Apple’s software includes Pro apps as well as the non-free OS X server. The non-free software US prices are:

  • Aperture: $79.99
  • Final Cut Pro: $299.99
  • Motion: $49.99
  • Compressor: $49.99
  • Logic Pro X: $199.99
  • MainStage 3: $29.99
  • OS X Server: $19.99
  • Apple Remote Desktop: $79.99

Given that and additional assumptions can lead to the following picture of the components of Apple’s Software sales (in $ million/quarter).

Screen Shot 2013-10-24 at 10-24-5.08.54 PM

Given this picture of the software business and the change in pricing, here is my forecast for the third and fourth quarters (in $ million/quarter):

Screen Shot 2013-10-24 at 10-24-5.21.30 PM

The foregone revenues could be as much as $450 million from what would have been received with existing pricing model.

So the question that naturally arises is whether this is “worth it”. Whether by offering free software hardware or service revenues rise.

Perhaps. Certainly service revenue in the form of iCloud might rise with more usage of iWork and iLife. But I don’t think that this is the calculus underlying the decision. Remember that Apple does not have a Profit/Loss accountability. It’s not necessary (and perhaps not even preferred) that a division balances costs and revenues.[1]

Fundamentally Apple remains a systems company where software is a key element in its definition of value. That is not changing. What is changing instead is the bundling of application software with the systems software and the system itself. The presence of iWork and hassle-free updating of that suite (and the same for the OS) means that utilization rates will increase.

I believe the logic for Apple is that usage of the products determines their value and therefore placing powerful software in the hands of more users means they will value the entire system more. This leads to the notion of greater “stickiness” or “lock-in” but also to higher satisfaction and loyalty, rate of upgrades and even more third party purchases and yet more usage.

This is the virtuous cycle platform custodians seek to engender. This is what Apple is trying to build and the transition of apps into the system bundle is part of this re-enforcement.

One wonders how long before Apple’s approach becomes the norm for other platforms.

Notes:
  1. The graphs in this post (and the preceding 1900 on this blog) were created using Numbers. []
  • nuttmedia

    As the “free” theme began to emerge during the event, I couldn’t help but think of the move as defensive against the Google docs/Chromebook/Android tablet combo in education and enterprise.

    For all the keynote potshots at Microsoft, Apple understands the larger threat to their post-PC aspirations comes from Google-based solutions. Providing a more feature-rich, gratis, cloud based solution helps prevent Google from establishing too-large of a services beachhead in key markets that matter.

    Also sets the stage for when the next puzzle piece falls into place next year with the likely iPad Pro (w/TouchID!).

  • Luis Alejandro Masanti

    I do not see it too much as a “defensive” movement as a “evolutionary tendency”: users “assume” that a lot is free. In Apple case, it became “free with hardware purchase”; in Google’s, “free with ads.”

    What I would like to see from Apple is a departure from Microsoft’s behaviour to “file formats.” I would like Apple to publish the file formats, maybe as Adobe did with .pdf (documented, free to use, but still propietary) so third parties can build applications to work along with iWork —or even, supplant them— without the risk of being only “hacked apps.”
    In this way, I think, Apple will broaden its environment. I think also that, doing this, business will embrace more freely. ¡And maybe will see an OpenWork suite!

    (I do not think that this can be apply to iLife, that are “identity apps.”)

    • jameskatt

      IWork uses RTF files. And PDF functionality is built into OSX.

      • Subtract

        No, it doesn’t. I’ve used Pages ’08 since it was released, and although I bought Pages ’09, I was unhappy with it’s text rendering so I never used it. I downloaded the new Pages yesterday, and it won’t open my Pages ’08 files. I’ll have to save them in Pages ’09 first.

  • markwilcox

    >> One wonders how long before Apple’s approach becomes the norm for other platforms.

    What other platforms did you have in mind? Android updates are free and Google started giving QuickOffice away free before Apple did so with iWork. Google don’t have an iLife equivalent but almost all of their software is free to the user anyway. Obviously their approach is not the same as Apple’s because they capture the value they create with ads not hardware sales.

    I don’t see how Microsoft can do the same with desktop Windows or Office unless/until they start making their own PCs. With RT and Phone consumers don’t pay for OS updates. Office is already “free” on the mobile devices too although of course you need an Office365 subscription to really use it collaboratively. Again, Microsoft don’t really produce an iLife equivalent.

    So, who’s left to adopt this model that owns somewhat similar assets?

    • albertodepaola

      QuickOffice was exactly what I was thinking, and that is only the last one. It also gives you extra storage capacity into one of the new services Google is trying to push to atomize its revenue. I think Drive, YouTube channel subscriptions, traditional content on Play Store, Wallet, Offers, Glass, Fiber and Project Loon all tied into Android/Chrome OS is the way they are trying to diversify and increase their revenue.

  • Javbw

    What would this look like as a percent of revenue compared to all of Apple’s Revenue – is this a couple percent off the bottom line for iPhones, iPads and (lastly) Macs? I can’t imagine what the chart would look like.

    Also, since they are really working hard at making these compatible between iOS and the Mac, and also rolling out collaborative cloud versions for some – is Apple following MS and Google toward making productivity apps a service – albeit a hybrid approach of theirs (Subscription for apps, cloud versions, no cost beyond ownership) ?

  • Paul Franceus

    An interesting aside to me is that the iWork apps for the web can access iCloud data from the web. There are currently no public APIs for this from Apple to developers on their iOS and Mac platforms – you can share documents between iOS and Mac but not on the web.

    In the past, Apple has added new functionality and private APIs in their own apps before eventually making them public for all developers to use. Adding iCloud APIs for the web seems to be the next logical extension. Is there a chance that we’d also see iCloud for Windows. Once the web platform is opened there’s nothing stopping people from using those APIs there too.

    Paul

    • jameskatt

      You can already use iWork and iCloud on Windows using a web browser.

      • Paul Franceus

        A good point. But I’m less interested in the end user than the developer. Microsoft already makes Azure services available to iOS developers, for example.

  • Luis Alejandro Masanti

    Another thought. I do remember the emergence of iTunes. It had —I do not remember exactly— one year contract with the labels and, at the end of the year, the proposition was risky. But Apple added iTunesU and then embraced the “podcast” revolution. In my vision, Apple “soilded” iTunes with other offerings in case labels drop out.
    In this same sense, I think that this “expansion” of iWork access —through free price— is a way of “soiling” the iCloud environment.
    Also, it includes collaboration editing, removing part of the missing features that plagued previous version versus competence.
    Also —in a typical Apple’s way, as far as I understand the company— they are releasing this cooperative&sincronicing characteristic throughout they own software, being able to try and debug.
    Next step, when sincroniciting is clean up of bugs, API’s for developers!

    I do not think we should pay too much study to the “revenue stream,” it’s a whole environment approach. (It is like wanting to evaluate the impact of the cost of the brochures for a trade shop respect to the company,)

  • Les_S

    What’s the possibility of Apple providing even more kinds of razor blades for free in hopes of selling more razors? Amazon is selling you the razor for very little hoping the customer will pay for content etc. Which value proposition will be more profitable? Is Apple trying to undermine the high-priced content model? And high priced content includes Google. That price is simply obfuscated. You pay Google but your payment is information about you that they aggregate and resell.

  • Peter Alguacil

    Interesting article. I think one major factor is that making OS X free is a great move to counter any additional OS version fragmentation on the Mac platform and will unify the majority of users under the latest version. This in itself has a lot of value. If you watched the WWDC keynote (I believe that’s where I saw this), they showed some numbers for OS X adoption and it was clear that OS X was a much more fragmented platform than iOS.

    Mac developers can now (soon) rely on having the same kind of luxury iOS developers have had for a while now; a user base using the latest and greatest OS. This should have tangible effects on what third-party developers can bring to the platform, which is good for Apple, and good for Apple’s customers.

    All in all, a big, bold play for Apple’s entire platform.

  • professortom

    But the pressing question is, will you continue to suffer abuse at the hands of iWorks now that it is free?

    • jameskatt

      Yes it’s great

      • professortom

        I was hoping Horace would give me/his audience an update on how iWorks is treating him. Horace, please consider this requested follow up for the next episode of The Critical Path.

      • http://twitter.com/LunaticSX Lun Esex

        Early feedback from Horace on Twitter:

        Horace Dediu @asymco
        I approve of the new Numbers
        1:46 PM – 23 Oct 13
        https://twitter.com/asymco/status/393116276216066048

      • professortom

        Thanks for the link! It’s hard to keep up with everything, all the time.

      • http://www.asymco.com Horace Dediu

        It’s an enormous improvement for me. The change in speed makes it feel like a completely different system.

      • professortom

        Thank you for your update here as well as on Twitter and The Critical Path.

      • stefnagel

        iWorks fulfills Apple aim, as Alex Lindsay puts it, of helping ninety percent of people do on computers what they do ninety percent of the time. The sea change is that the ten percent of IT level users don’t count anymore; they used to run the joint.

    • marcoselmalo

      Apparently, Apple has removed AppleScript support from this new version of iWork. A small percentage (but possibly important one) is outraged or disappointed, as they rely on AppleScript for their workflows. These users may need to move to MS Office or some other more powerful productivity suite.

  • Nigel Hietala

    There are also indirect benefits to Apple via a likely uptick in high quality 3rd party apps for OS X. Supporting OS X just got cheaper as developers can seriously consider that they only need to support the very latest OS, instead of a couple of previous versions as well. They can also take full advantage of all the new API’s the latest updates provide. I am sure there are some customers that for various reasons will stick with old versions of the OS, but the majority now have no real reason not to update. More reasonably priced apps, that use the latest and greatest OS features, would in turn help Apple sell even more Macs.

    • Luis Alejandro Masanti

      An important difference between iOS and OS environments is the life expectancy of hardware. iPhones must be the longest living cellphone (working updated, not just working) with 3-4 years, But desktops live longer.
      And hardware is one of the reasons for not upgrading the OS.
      (See that backward “free” is just three cycles,)

    • marcoselmalo

      Way way way back in the day, there were users that couldn’t update to OS X because Quark Express was slow to port to it. Even Final Cut Pro wasn’t OS X native right away, which held me back from full adoption. What a blessing when FCP for OS X arrived. Free at last, free at last, Lord Almighty, we are free at last (from managing system extensions).

      • orienteer

        Geez, how we forget! Like other graphics professionals we were so dependent on Quark that our shop stayed on OS9 almost 3 years into OSX. Still, is I recall correctly, this was the opening for Adobe InDesign to gain dominance, right?

      • marcoselmalo

        Yeah, that was when InDesign started to gain acceptance. Before that, I remember people disparagingly calling it PageMaker Pro.

  • mjw149

    I’m not sure this is being managed appropriately from a business focus perspective.

    Yes, Apple accounts differently, but when you give away the OS and give away the productivity as basically OS features their focus will necessarily change. No longer are there paid users complaining. Freemium makes more sense for more than websites.

    Steve Jobs was very clear how they operate – by choosing their foci carefully. I’m not sure they’re doing it here. Google drive is core to Google in a way that it isn’t for Apple, because of all of Google’s email users and increasing business users. It’s obviously core to Microsoft. But for Amazon and Apple, their competitors’ business model around productivity might be a bad choice for reasons of internal emphasis.

    Iwork especially isn’t web-native and according to reports has done away with the local scripting support. It’s no longer intended, as MS Office is and Google Drive is, to be a platform unto itself. But it probably NEEDS to be.

    Itunes is a platform on a platform. It became a ding an sich AND HAD TO in order to drive value to the hardware. iWork, email, messaging, Apple needs to seriously build these services up in popularity and build them into a platform. Not because all their users are increasingly locked into Google, but because they can’t be competitive without magnets like these. It’s already happening, the less money they make from software, the less they offer. All the hardware guys dominate and they still can’t get online competitive or make the rich acquisition.

    Getting icloud storage revenue isn’t enough. It’s not a matter of, oh, they sell hardware and it’s free as a value add. Because long term, it stops being a value-add if it’s irrelevant and it just becomes wordpad. The value can’t just come from high fashion and high design hardware.

    • Luis Alejandro Masanti

      – Iwork especially isn’t web-native and according to reports has done away with the local scripting support

      Apple use to focus in user experience, not in features. They are doing a big mix with iWork: iWork for OS is one app (running on Intel), iWork for iOS (running in ARM/A7) and iWork on the iCloud (running on JavaScript),
      Intel/A7 versions are programatically mostly identical (except for the user interface) buy the web version is a totally different beast. And they should look, work and integrate seamlessly.
      For a programming point of view, this is nightmare.
      So, I think that —maybe— Apple just say no to a lot of thinks (AppleScript, for example) to have the first version fully compatible in the three environments.
      Next version, more features.

      Or, maybe, I’m totally lost and AS won’t ever be back.

  • http://www.paulhealyblog.com Paul Healy

    Surely the biggest benefit is sales of other Apple products due to the cross platform nature of the apps – trading off lost software revenue for additional hardware sales?

    • jameskatt

      Hardware and services sales. iTunes already makes a substantial profit for Apple.

  • Kristopher Armstrong

    Apple has done this before. Appleworks was free with purchase of a Mac in the 90s. They had a staggering bundle of ‘Performa’ software.

    • sigaba

      …In that, your Performa would literally stagger trying to run half of it!

      (Sigaba proudly ran a 6205CD all through college.)

    • RAZ

      Yep. Remember the included Claris Works on my close to twenty year old Performa.

    • stefnagel

      Hypercard was also free. What a great educational tool it was.

      • Luis Alejandro Masanti

        It was wonderful! (And I programmed up to nuclear simulation facilities!)

        I’m still waiting for HyperXard! (Or HyperCard X.)

      • stefnagel

        Amusingly the card as visual metaphor is the dish du jour.

      • Luis Alejandro Masanti

        In some impressive way it is amazing how many “technologies” grew up from Apple’s engineers, Bill Atkinsons in this case,
        According with Tim Berners Lee, the creator of the WWW, he was inspired by HyperCard to do it.

  • Chaka10

    Just to be clear, I believe your ITunes, Software and Services revenues of ~$4.5 bb in Q2 includes “gross revenues” on agency businesses, correct? The as reported revenues for this quarter were $3.99 bb, according to Apple’s 10-Q. Note, this segment presumably also includes the “distribution Traffic Acquisition Cost” payments from Google, which a Morgan Stanley report estimates to be $877 mm for 2013 (I believe that is calendar 2013). (Apple doesn’t tell us where that money is recognized, but I assume it’s in this segment after the September ’12 restricting by Apple of its product reporting segments.) My own estimates suggest that Apple received over $200 mm in distribution TAC in Q2.

    • http://www.asymco.com Horace Dediu

      Yes, gross revenues, as labeled. I’m not sure Google TAC is part of iTunes. I had thought that was applied to iPhone/iPad revenue. If you have any reference to that change I’d like to see it. Note that Apple shifted accessories to device revenues and it would make sense to me that TAC is a direct benefit of the device efforts rather than any of the efforts of software groups.

      • Chaka10

        Ok, thanks. Perhaps the Google TAC is what they mean in “non-software services that are attached to hardware and software products” that are included in the relevant device revenues.

      • KirkBurgess

        I had thought it was the opposite – accessories were separated from the hardware lines?

  • http://ryantate.com ryantate

    >One wonders how long before Apple’s approach becomes the norm for other platforms.

    This is a strange way to frame things, given that Google has been giving away system and application software for some time now.

    • Eric Swinson

      But Google uses ad revenue to subsidize their no cost to end users approach. So now is a matter of do I buy a device and use google’s ad supported form software, I buy a device and use the free software apple gives me or I buy a device and pay microsoft for software?

      • charly

        If it is on arm than the microsoft software is also for free.

      • Luis Alejandro Masanti

        I think that you need a subscription to …365,
        I do not know if this subscription is free.

      • http://www.laugh-eat.com/ mdelvecchio

        the “free” version for surface is not for commercial or nonprofit use. personal only.

      • charly

        Dumb Microsoft move

    • stefnagel

      The Apple approach is to build the bundle, as Horace says. It’s not a giveaway; it’s creating more value in the platform of software, hardware, content, and services.

      Don’t believe Google doesn’t want some of the hardware revenue it gives to Samsung and Samsung some of the services revenue it gives to Google. They just don’t know how to build the bundle.

      And they both would love to have the 500 million plus credit card carrying Apple folks who, as my old mentor said, willing part with their hard earned bucks.

      • jameskatt

        Apple is not bundling the app software. It is giving it away for free.

      • Tatil_S

        Bundling with hardware.

      • Luis Alejandro Masanti

        What means “bundling”?
        I think it is “Put 2 or more things for less of the combined price.”
        If one thing (the iPad) cost $500- and the second (iWorks) cost $40, and I sell you for $500 why it could’t be a bundle (say, 480+20) in place or a free offer (500+0)?

      • stefnagel

        I did list the items in the bundle: hardware, software, services, content. So Apple makes most software free, content cheap or almost free at about a buck a title, services mostly free as iCloud apps and such … all to create value in their hardware.

        Off topic: Bundling once meant cuddling up to your main squeeze before marriage, usually with a bundling board between to unsqueeze the sitch. But that’s another story.

      • TheRealCBONE

        I would give you a thousand ups for “And Microsoft’s efforts drip with flop sweat; a drill sergeant trying to sell dresses.” if I could. I pictured Ballmer yelling, “Dresses! Dresses! Dresses!”

      • stefnagel

        Ha!

  • http://www.jlist.com Peter Payne

    If MSFW follows them they’re going into darkness, giving up one of the two pillars holding them up. They need to zig when Apple zags…

    • Luis Alejandro Masanti

      Somewhete I think I read that the “free” in Microsoft is just for consumers, not enterprises. I think they already have this annual support contracts… that make the lions’ share of revenues.
      So, Microsoft-going-consumer (maybe, just a little part of Microsoft) is the part that is going free,
      Not too much change in the business model.

  • Guest

    Whatever happened to Apple’s ridiculous stunt of charging $5 for some AirPort upgrade or whatever? And blaming it on some ridiculous accounting rule?

    • jameskatt

      To bang the gong again and again and again: the accounting rule was real. It was an SEC requirement. It forced Apple to charge for the upgrade. It would have been illegal for Apple to do it for free.

    • Cogito

      It was 99¢. Check the facts before making any statements, please?

    • http://www.asymco.com Horace Dediu

      Revenue Recognition for Arrangements with Multiple Deliverables

      For multi-element arrangements that include hardware products containing software essential to the hardware product’s functionality, undelivered software elements that relate to the hardware product’s essential software, and undelivered non-software services, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of selling price (“ESP”). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. ESPs reflect the Company’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. For multi-element arrangements accounted for in accordance with industry specific software accounting guidance, the Company allocates revenue to all deliverables based on the VSOE of each element, and if VSOE does not exist revenue is recognized when elements lacking VSOE are delivered.

      For sales of qualifying versions of iPhone, iPad and iPod touch (“iOS devices”), Mac and Apple TV, the Company has indicated it may from time to time provide future unspecified software upgrades and features to the essential software bundled with each of these hardware products free of charge to customers. Essential software for iOS devices includes iOS and related applications and for Mac includes OS X, related applications and iLife. The Company also provides various non-software services to owners of qualifying versions of iOS devices and Mac. The Company has identified up to three deliverables regularly included in arrangements involving the sale of these devices. The first deliverable is the hardware and software essential to the functionality of the hardware device delivered at the time of sale. The second deliverable is the embedded right included with the purchase of iOS devices, Mac and Apple TV to receive on a when-and-if-available basis, future unspecified software upgrades and features relating to the product’s essential software. The third deliverable is the non-software services to be provided to qualifying versions of iOS devices and Mac. The Company allocates revenue between these deliverables using the relative selling price method. Because the Company has neither VSOE nor TPE for these deliverables, the allocation of revenue is based on the Company’s ESPs. Revenue allocated to the delivered hardware and the related essential software is recognized at the time of sale provided the other conditions for revenue recognition have been met. Revenue allocated to the embedded unspecified software upgrade rights and the non-software services is deferred and recognized on a straight-line basis over the estimated period the software upgrades and non-software services are expected to be provided for each of these devices, which ranges from two to four years. Cost of sales related to delivered hardware and related essential software, including estimated warranty costs, are recognized at the time of sale. Costs incurred to provide non-software services are recognized as cost of sales as incurred, and engineering and sales and marketing costs are recognized as operating expenses as incurred.

      The Company’s process for determining its ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. The Company believes its customers would be reluctant to buy unspecified software upgrade rights for the essential software included with its qualifying hardware products. This view is primarily based on the fact that unspecified software upgrade rights do not obligate the Company to provide upgrades at a particular time or at all, and do not specify to customers which upgrades or features will be delivered. The Company also believes its customers would be unwilling to pay a significant amount for access to the non-software services because other companies offer similar services at little or no cost to users. Therefore, the Company has concluded that if it were to sell upgrade rights or access to the non-software services on a standalone basis, including those rights and services attached to iOS devices, Mac and Apple TV, the selling prices would be relatively low. Key factors considered by the Company in developing the ESPs for software upgrade rights include prices charged by the Company for similar offerings, market trends in the pricing of Apple-branded and third-party Mac and iOS compatible software, the nature of the upgrade rights (e.g., unspecified versus specified), and the relative ESP of the upgrade rights as compared to the total selling price of the product. The Company may also consider additional factors as appropriate, including the impact of other products and services provided to customers, the pricing of competitive alternatives if they exist, product-specific business objectives, and the length of time a particular version of a device has been available. When relevant, the same factors are considered by the Company in developing ESPs for offerings such as the non-software services; however, the primary consideration in developing ESPs for the non-software services is the estimated cost to provide such services, including consideration for a reasonable profit margin.

      For the three years ended September 29, 2012, the Company’s combined ESPs for the unspecified software upgrade rights and the rights to receive the non-software services included with its qualifying hardware devices have ranged from $5 to $25. Revenue allocated to such rights included with iOS devices and Apple TV is recognized on a straight-line basis over two years, and revenue allocated to such rights included with Mac is recognized on a straight-line basis over four years.

  • Guest

    Whatever happened to Apple’s ridiculous stunt of charging $5 for some AirPort upgrade or whatever? And blaming it on some imagined accounting rule?

    • 程肯

      Uhm, well, it wasn’t imaginary.

      Whatever happened to keeping up with the times?

    • triad

      Thanks for posting this misinformed comment three times.

    • JLM

      It wasn’t imagined, IIRC it was a SEC requirmeant and that rule got changed.

    • jameskatt

      To bang the gong again: the accounting rule was real. It was an SEC requirement. It forced Apple to charge for the upgrade. It would have been illegal for Apple to do it for free.

    • Johnny

      That was under older accounting laws in 2007. You can thank WallStreet for changing the rules after devastating the world economy in 2008.

  • RAZ

    Valid reasons on Apple’s part for them to price them so, but am I the only one thinking it’s interesting that Apple’s cost for OS’s are now zero, while it charges outrageous costs for adapters, chargers, etc.?

    • jameskatt

      You are wrong. Apple’s cost for its operating systems is billions of dollars. It is an investment involving hundreds of programmers and engineers and designers working together. In return for giving it away free to its hardware and services customers, Apple gets even more billions of dollars in purchases.

      Apple targets affluent people who want the best products. Its products are very fairly priced for this market. Apple doesn’t target the junk market.

      And affluent people – like the Chinese middle to upper class who make up 3% of the world’s population but purchase 30% of the world’s luxury goods – LOVE Apple Products.

      Complaining about the price of Apple products is like complaining about the cost of Mercedes Benzes and BMWs.

      • RAZ

        What am I wrong about? I never said Apple did not have significant costs in their developing their OS. Only that it was interesting that their charge to consumers for it is now zero. While their charge to consumers for lightning connectors is what $40 or $50?

      • Cogito

        $19 for 1 meter and $29 for 2 meter from Apple.

    • TheRealCBONE

      Don’t tell Apple, but they could actually charge more for their accessories, make them even more annoyingly proprietary, change them yearly, and people would still buy them because they are the only game in town. Current pricing is Apple showing restraint.

    • Luis Alejandro Masanti

      Software is quite different than hardware!

      And, by the way, the cost of software is not zero; the price we pay for it is zero. The cost involved in developing the soft, Apple charges as “value” in the cost if hardware.

    • marcoselmalo

      The connectors are proprietary, but that doesn’t mean Apple doesn’t license to third parties. I spent $8 for a MacAlly (I think) 30 pin cable that has held up much better than the original that came with the iPad. Yeah, the 3rd parties have to tack on the royalty to the price, but they have to compete with each other, too. Bottom line is that the Apple customer is not a prisoner to Apple as far as accessories are concerned.

  • http://aaplmodel.blogspot.com/ Daniel Tello

    Horace, the change would not be as abrupt, as some of these things get deferred and reported over 3 years.

    From the 2011 10-K, page 50 (PDF here http://files.shareholder.com/downloads/AAPL/1329178701x0x688718/d5835a0b-e2fb-427e-93a5-0a863b4efa0b/AAPL_10K_FY11_10.26.11.pdf ):

    “beginning in July 2011 the Company defers all revenue from the sale of upgrades to the Mac OS and Mac versions of iLife and recognizes it ratably over 36 months.”

  • bregalad

    It’s a shame they aren’t actually putting “powerful software” into anyone’s hands. Numbers is weaker than ever and poor Pages is only a shadow of its former self. It’s shocking that Apple learned nothing from iMovie HD and Final Cut Pro X. Giving me a tool I can’t accomplish anything with is worse than selling me a good tool at a low price.

    • jameskatt

      You have to realize that Numbers and Pages were converted to web apps. And all versions have to be compatible – OS X, iOS, and Web App versions.
      Thus, some features have to be removed until a work-around or technological advance can be developed. For example, Applescript only works in OS X, thus Applescript functionality was removed.

      Sure, Apple learned from Final Cut Pro X and iMovie HD. The lesson learned is to release the working app then repeatedly and incrementally improve the product. This is the Apple way. It has done it with every product. Final Cut Pro X is already, as a result, a fully professional product.

      As Steve Jobs said, real engineers ship product. You simply cannot keep adding features and tinkering to the point of trying to achieve a perfect product but never ship it. Somewhere along the line you have to say “no”. And Apple is the best company at saying “no”. And Apple is the best company at removing feature bloat.

      Now that Pages and Numbers are cross-platform RELEASED products, not vaporware, Apple can do the job of repeated and gradual iterations to improve the product.

      • Luis Alejandro Masanti

        Totally agree!

      • mildmanneredjanitor

        I have been reading with interest how iWorks has regressed functionality so much that Apple made it free and have effectively called it a feature.

        My ignorance, apologies, but becoming a Web app, does that mean you can also only use it online?

    • Luis Alejandro Masanti

      It is a transition to this new mix: OS/iOS/iCloud.
      Give Apple time to finish the full act!

    • dicklacara

      At the risk of being OT, I can’t let your criticism of Final Cut pro X go unchallenged.

      Here’s a video by Michael Cioni. His company, Light Iron, does Post, DI, etc. for movies like: 42, The Girl With The Dragon Tattoo, Muppets… Michael is a talented creative, engaging speaker and has an amazing mind.

      The entire video is a great watch, but at 13:42, Michael talks about the future of FCPX (I’d love to get his take on the Mac Pro).

      http://vimeo.com/73797466

      As to iWork, our household consists of 5 Adults and and 3 teenagers. We each have an iPad, an iPhone and share 4 Macs. My daughter is a single mom, a soccer mom, active in the schools — and both she and my granddaughter teach classes in church.

      We have been Microsoft-free and MS Office-free for over 3 years. iWork gives us everything we need and we all use it.

      As others have posted, Apple is taking the long-term approach by making the iWork app user experience consistent across iOS, OS X and the iCloud.

      I too, believe that this is the right approach, even though, on some platforms we lose some features. I believe these will be restored and we will have feature parity on all platforms.

      It is interesting that MS does not offer feature (and user experience) across MS Office on OS X, Windows, Cloud, and even on their Windows tablets.

      To some, the biggest hit to iWork on OS X is the removal of AppleScript support. I believe that this, too will be reimplemented on OS X, iCloud and iOS.

      In fact, I have long pushed for an improved AppleScript capability on iOS. It would add end-user programmability and would provide a means of inter-app communication — while preserving sandbox security.

  • Tim F.

    If you’re looking for a replacement to that $450 million in lost revenue, it seems important to look at the 30% cut from all App Store downloads. I thick the more relevant question is: has the cost of providing the App Store infrastructure been reduced to the point where the 30% cut can account for any revenue lost from internal software revenues?

    Maybe not yet, but how soon?

  • tpurves

    You could read it as powerful competitive move to undercut Microsoft’s primary business model (which is still per-machine OS and office licenses). Microsoft’s model makes less and less sense in a cloud, multidevice and integrated product world. This is Apple trying to kick MSFT further into obsolescence and compete in a way that MSFT can’t.

    You could read this a competitive response to Google, who already offer free OSes and web-based productivity suite (google drive) with a constant stream of free upgrades. It’s only a matter of time before Google’s office suite and chrome book OS is widely-enough considered ‘good enough’ to start triggering bottom-up disruption. So you could say Apple had no choice but to give up revenue and has been forced to compete on Google’s terms.

    Lastly, from an ecosystem perspective you could look at the advantages and operational savings related to having all (or almost all) your users using the latest version of your stack. MSFT and Google ecosystems both suffer from heavy fragmentation due to many people stuck on old versions of OS/products. Apple is moving to a model where they can rapidly move users to the latest and greatest versions. This reduces their own support costs, their developers’ costs and increases the value of the ecosystem in the eyes of developers.

    • TheRealCBONE

      This was a move to build casual Mac users. General purpose business users (where MS gets most of their Windows revenue from) will never buy Mac in large (Windows) numbers until they get as cheap and easy to support as a PC with Windows. Not going to happen unless Apple screws up and chooses razor thin margins and teetering on the brink of bankruptcy over fat stacks of perpetual cash.

      Apple can do what they want in their space because their share is so low in comparison. They want Microsoft to stay bloated and stodgy, maintaining market share and sales due to inertia and continuity, while they sit back and make all the money. They want Google to shotgun and try every new thing under the sun like an over-caffeinated hummingbird, alienating customers with an ever increasing number of ads, while they sit back and make all the money.

      • http://www.laugh-eat.com/ mdelvecchio

        personally in my experience as an enterprise .NET developer and admin for fortune 100, but a recent Mac user (7 years), i find OS X easier/cheaper to manage…but i dont do site-wide desktop management, only server admin.

        id say the main reason most orgs arent doing OS X (some are), is because the Windows guys know Windows. and some of them have an irrational grudge against Apple/Mac because thats what they think Windows guys are supposed to do.

      • http://www.asymco.com Horace Dediu

        I think the world’s most valuable company uses OS X.

    • marcoselmalo

      You’ve unpacked the implications well!

      The other thing I see them doing is shoring up PC sales, which have been declining for every manufacturer.

      One interesting thing is how this will show up on the balance sheet. Going forward, the development costs for the Mac iWork apps are going to cut into product margins. Will this be accounted for or obscured? (Of course, a big question is, how much will it matter, spread out across x number of machines?

  • charly

    Free Mac os X kills hackintosh.

    It was true that it was legally iffy but now with a free OS there is no moral excuse.

    • TheRealCBONE

      How does it kill it? If anything it makes it more desirable if you don’t want to pay Mac money in the first place but still want to give it a shot.

    • Luis Alejandro Masanti

      Two points:
      1) Generally, hackintosh usually was about hardware hacking.
      2) It seems to me that what Apple gives for free is the “upgrade” after you received a free original with the purchase of Apple hardware.

      So, somebody will still have a moral excuse to do it.

  • fl1nty

    classic commoditization of complements?

  • Davel

    One wonders how long before Apple’s approach becomes the norm for other platforms.

    Google has been doing this for years.

    • Virtuous circle

      Where Google does it, it doesn’t give you added value in a complementary product (free software that adds value to the hardware you purchase) –

      Google makes up for it by selling you to advertisers and making your experience less pleasant with advertising.

      Apple makes up for it by selling more hardware to people who appreciate the added value.

  • Davel

    Horace

    Think you are being too narrow. I read an article today that posits the latest announcement was a declaration of war on the pc’s.

    The iPad Air is not a reference to how light it is, but a reference to their PC. They are saying tablets are good enough. By bundling productivity software they are saying a tablet is good enough to replace your PC. We offer enterprise level cpu’s with 64 bit power, productivity software and a nice portable form factor.

    Why punish yourself with a PC when you don’t need one? Apple seems not to care if they kill their PC business because they only have 5% anyway and they own mobile.

    This is the beginning of the realization of Jobs’s comment about cars and trucks and tablets and pc’s.

    The iPad pro is next, but the software isn’t there just yet.

    • charly

      Own mobile?

      They have their own mobile operating system but looking at how their tablets are doing? An exploding market while they are standing still. I wouldn’t call that owning

      • http://twitter.com/LunaticSX Lun Esex

        Depends on whether one is talking about “owning” the market share or “owning” the profit share.

      • charly

        Profits are not that important. Keeping the lights on is but Android is doing that

      • http://twitter.com/LunaticSX Lun Esex

        “Profits are not that important.”

        I think it’s past your bedtime.

      • charly

        Making a profit is important but it doesn’t matter if the profit is nice or fantastic as both are reasons to do it.

      • http://twitter.com/LunaticSX Lun Esex

        “it doesn’t matter if the profit is nice or fantastic”

        “Fantastic” profits tend to be valued fantastically more than just “nice” one.

      • charly

        Fantastic profits is an open invitation for competition. Nice profits are better in the long run

  • obarthelemy

    “One wonders how long before Apple’s approach becomes the norm for other platforms.”

    You mean Google’s approach right ? ‘coz they were the first ones with a free office suite (2 actually, Docs and QuickOffice), and a free OS+updates (ChromeOS). Apple are just trying to catch up. Again.

    • charly

      Solaris and openoffice were free so i would say Sun was first

      • obarthelemy

        I don’t think Solaris is free except in dev/student licenses, but broadly, yes.

      • charly

        Sun’s not-really-gnu Solaris was free

    • http://twitter.com/LunaticSX Lun Esex

      1983: Apple Lisa. Included software: LisaWrite, LisaCalc, LisaDraw, LisaGraph, LisaProject, LisaList, LisaTerminal

      Cost of Lisa software updates: $0.

      1984: Original Macintosh. Included software: MacWrite, MacPaint (I think MacDraw was included later as well, once it was ready)

      Cost of Macintosh software updates: $0 for the system software until it was re-branded to “Mac OS” as part of the program of allowing licensed Macintosh clones.

      $0 for the other bundled software until Claris was spun out in 1987 to sell Apple’s first-party software, because third parties were concerned about Apple’s bundled software having an unfair advantage and decreasing users’ incentive to buy competing third-party software.

      The Apple II and Apple /// lines were also provided with free system software from the beginning in the late ’70′s until the early ’90′s with GS/OS for the Apple IIGS. Even then, computer stores and user groups were allowed to distribute copies for free to people who brought in their own floppy disks to copy it onto.

      • obarthelemy

        1981: Osborne 1, bundled with everything (http://en.wikipedia.org/wiki/Osborne_1)

        updates were probably not free though.

      • http://twitter.com/LunaticSX Lun Esex

        “Google’s approach … they were the first ones with a free office suite”

        “~ No, wait, Osbourne’s approach!”

        “No, wait…”

        (“Duck season!” “Rabbit season!”)

        The truth of the matter is that selling operating systems wasn’t seen as a profitable business until Microsoft managed to strike a crafty deal with IBM that allowed them to sell their own version, MS-DOS, of the DOS that IBM contracted them for, PC-DOS. Until the PC clone market came into existence, a computer’s OS and hardware was just so tightly connected that it simply didn’t make sense to anyone to sell them separately–especially as a shrink wrapped product. Yes, there was CP/M, but Digital Research didn’t really think it was worth selling as a separate, packaged product. They focused on cheaply licensing it to be sold with other vendors’ hardware in order to provide a baseline to sell their compilers and other tools to customers. This is why IBM shrugged and basically said “yeah, sure, whatever” when Microsoft wanted to sell their own version of PC-DOS.

        Apple only followed suit with actually charging for their OS when they tried licensing it to other companies to make Mac clones. (Conventional wisdom at the time being that software sales were more lucrative than hardware sales, with Microsoft as the main example. Turns out that was more of an aberration.)

        Clearly contrary to your previous post, though, Apple isn’t playing catch up, here. Instead they’re actually returning to a practice they employed in the past, about as many years before Google was even founded as Google has been in existence to this day.

        Perhaps next time you may wish to check Wikipedia *before* posting. :)

      • obarthelemy

        1- I was thinking Mobile, but you want to move the goalposts back to computing prehistory. Fine, Apple wasn’t first then either.

        2- Actually, my answer was a bit tongue-in-cheek: Horace has a tendency to attribute anything and everything to Apple, so I’m countering by attributing anything and everything to Google, or at least providing examples of Google doing that first. Free OS and apps indeed aren’t an Apple invention, neither now, nor then.

        As for the de-bundling of hardware, OS and apps (and service maybe), indeed it may just be an interlude. It did bring about the most lively yet period for IT, and is doing that again in Mobile. It’s probably not such an anomaly, nor such a bad model.

      • HelloWorld

        Google was first to invent lying as a profitable business model.

        Top 10 lies from Google:

        1) “1 trillion Android phones are activated every day”.

        2) “There is no Android fragmentation”.

        3) “Android is more secure than iOS”.

        4) “We never share your personal data with the CIA”.

        5) “Our self-driving cars never crash” (http://jalopnik.com/5828101/this-is-googles-first-self+driving-car-crash)

        6) “When our self-driving cars crash, they are driven by a human driver”.

        7) “We prevent self-driving cars from crashing by making sure a human driver is always driving our self-driving cars”.

        8) “Our so-called self-driving cars can totally drive without a human driver”.

        9) “Google Glass will never serve ads”.

        10) “We have never paid Obarthelemy for his trolling”.

      • http://twitter.com/LunaticSX Lun Esex

        To be fair, much of that would really really just be copying Microsoft’s institutionalized tactics. :)

      • http://twitter.com/LunaticSX Lun Esex

        “Thinking mobile”? But your examples were “Docs and QuickOffice” and “ChromeOS.” Docs was designed and targeted for desktop operating systems. ChromeOS is a laptop/desktop OS.

        Regardless, that’s goalpost-moving of your own, since what Apple just did was make their desktop OS and office apps for web, desktop, AND mobile free.

        “I’m countering by attributing anything and everything to Google”

        So, you just officially declared “I’m biased, and my arguments may have no basis in reality whatsoever.” In other words, “I am a troll.” Ok, then, thanks for making that clear.

      • obarthelemy

        That from the guy that conveniently forgets Osborne ?

        An example of an argument of mine that has no basis in reality ? Your acrobatic misquoting makes looking for one from you rather easy…

      • http://twitter.com/LunaticSX Lun Esex

        You claimed Google “were the first ones with a free office suite.”

        I never claimed Apple was first, I only pointed out that Apple had already done it, many years prior. My refutation of your claim had no need to reference prior instances. In fact, even your own reference to the Osbourne 1 reinforces my refutation to your initial claim.

        “an argument of mine that has no basis in reality”

        That increasingly appears to be all of them.

        “Your acrobatic misquoting makes looking for one from you rather easy”

        So easy that you have provided no examples.

        You may wish to stop while you are behind. Or I could continue to provide entertainment to the other readers with demonstrations of my acrobatic skills around your replies.

      • Shawn Dehkhodaei

        Please keep up the acrobatic skills …. I’m enjoying this :-)

      • charly

        Looking at the PC and Android market and i would say something else. Hardware is difficult to do profitable without barriers

      • Luis Alejandro Masanti

        My memory is fragile, but prior to that (DOS) I think that Bill Gates already was selling the Basis interpreter.
        (I do not think he ever paid any kind of royalty to Dartmouth College for copying the IP.)

  • Cody

    “Remember that Apple does not have a Profit/Loss accountability. It’s not
    necessary (and perhaps not even preferred) that a division balances
    costs and revenues.”

    What exactly does this mean – that individual divisions don’t need to turn a profit? Is that discussed somewhere else in more detail? From what little I know most other companies I’ve worked for grow to a certain size and start doing P&L for each department – then it becomes a competition about who can grow the fastest (and least sustainably) until the departments overreach and the entire thing crumbles.

    If Apple does differently I’d really like to hear more about it, in layman terms.

  • obarthelemy

    Apple are a different beast: their hardware, OS, and application software are 100% dependent on each other (I think iTunes for Windows is the only outlier). I remember the counter-example when I was working for Novell Education, which was pretty much a separate entity from Novell, and was out to get money even when it meant hurting Novell-the-OS sales. Apple are smart enough to not compartmentalize that way (MS, too, MS education is very much run like a marketing tool, not a profit center)

    Apple Office becoming free can seen as
    1- a price promotion, that’s $30 off.
    2- a lock-in tool, so that users don’t go to Google Docs (free) nor MS Office (expensive). I don’t think the “free” move comes as MS is readying a native iPad version of Office by chance.
    3- an anti-fragmentation move, at least for document viewing/editing: all content providers can count on those apps being available. Then again, HTML and PDF are, too, so the use cases for AOffice are narrow. I don’t think there’s an API for integration into 3rd-party apps, so that’s not a factor.

    I’m a bit surprised by that move, as I’m seeing Apple milking their customers in lots of other ways (hardware upgrades prices, accessories, buyback prices…). Then again my marketing 101 class could be summed up by “either be expensive, or be free, if you need to be in-between there’s something wrong”.

    • Johnny

      I was surprised by you post until your edit. I thought you might actually understand something/anything but your “milking” comment betrayed you. Maybe you should take the marketing 102 and 103 classes? Maybe some Econ, or corp strategy?

      Office is free on the surface 2 not the pro version. Google docs relies on users trusting Google with business or personal info. Google that makes almost all their money on reading your info.

      Whatever….

      As a French resident, who do you prefer to have your personal info and your government’s info? The NSA or Google?

      Trick question.

      • obarthelemy

        Google also offer QuickOffice for free, which is a non-cloud suite.

        As for Google being more NSA-ish then MS or Apple, I’m REALLY not convinced. They all get their confidential warrants.

      • HelloWorld

        Google Comes Under Fire for ‘Secret’ Relationship with NSA:

        http://www.pcworld.com/article/217550/google_watchdog_white_house.html

      • obarthelemy

        At this point, US citizens have given their government the right to grab any info they want, and to do it secretely, so the only alternative to complying with requests is to close up shop quickly. I’m sure Google are not the only ones impacted, and this is not a Google problem, this is a US problem. (not that the US are the only ones doing that, but in the present case…)

      • charly

        At the moment google may be closer to the NSA but if they want to keep operating in Brazil and possible EU than they have to go local and stop the NSA from access or at least the for NSA

    • Apple II Forever

      Apple actually has lots of little utility programs for Windows. iTunes, Quicktime, iCloud, Airport Utility, etc.

      Not as many as they used to have, of course: Safari and Appleworks for Windows are no more!

  • http://www.networkworld.com/ John Cox

    I don’t get the impression, myself, that Apple executives think a lot about what Microsoft or Google are doing and then make their decisions about what to do next.

    Dediu’s central assertion in this post — to me — is the following: “Fundamentally Apple remains a systems company where software is a key element in its definition of value…The presence of iWork and hassle-free updating of that suite (and the same for the OS) means that utilization rates will increase. I believe the logic for Apple is that usage of the products determines their value and therefore placing powerful software in the hands of more users means they will value the entire system more. This leads to…higher satisfaction and loyalty…”

    Which is interesting: traditionally, a “systems company” was about computing infrastructure. Apple is a systems company that’s oriented around the “user experience.” Users buy into that system. It seems different from the idea of “good enough,” which I think encourages users to buy-in based on convenience or cost/price.

  • Price Signaler

    As an indie Mac developer, I love this news, for lots of reasons.

    First, it saved me $30. I’m not rich, so that’s pretty nice!

    Second, it means all my users are that much more likely to upgrade, and upgrade sooner. I like having users on newer versions of the OS. It means I can use new features sooner. Since 10.9 supports all the same Macs that 10.8 did, it’s probably feasible for a 10.8-only app to go 10.9-only in its next release. That’s a big deal.

    Third, and most importantly to me, it means OS X is no longer sending a horrible price signal to my potential customers.

    When OS X cost $129, people looked at it and thought that it represented the cost of developing OS X, which wasn’t entirely unreasonable since it was on par with other big complex software they bought (like MS Office). But when OS X costs $19, what message is it sending? Clearly 10.8 ($19) is a drastically more advanced piece of software than 10.0 ($129), and no, neither of these had “upgrade pricing”. At $0, people are forced to recognize that the cover price isn’t the price it costs Apple to develop the software.

    Buying a $19 utility program seems perfectly normal, but when you have to compare it against “the entire rest of the operating system” at the same price, it seems weird, even to me. Removing OS X from the equation should make this an easier sell than before.