Apple Drives Consumer Software Prices to Zero

on October 22, 2013

iLife screenshot

Oct. 22, was not a good day to be in the consumer software business.

In addition to a slew of new iPads and Macs, Apple announced the avaibility of new versions of some key software offerings. Mavericks, the new version of Mac OS X: free. iLife, the suite of media apps for Macs and iOS: free. iWork, the suite of productivity apps for Mac and iOS: free.

If your business model depends on selling software, the only saving grace is that these applications run only on Apple hardware. iWork and iLife have no real equivalent in the Windows world, but for contrast, upgrading a Windows 7 machine to Windows 8.1 (a bad idea for reasons unrelated to price, but that’s another story) will cost at least $70.

Apple did not slash software prices to zero to discomfort Microsoft; Apple doesn’t much care about Microsoft these days. Rather it is a solidification of a business model that Apple has been developing for years. ((In the past, Apple has always charged at least a nominal amount for major OS X upgrades. Its switch in policy was helped by a change in accounting rules. In the past, accounting rules required that companies charge for significant upgrades of built-in software unless the manufacturer had deferred recognition of some revenue at the time of sale. But a change in Financial Standards Accounting Board rules let Apple give Mavericks away even though it had not deferred revenue. I’m indebted to Glenn Fleishman for pointing this out to me.)) It earns hefty margins on hardware and uses inexpensive, and now free, software to attract consumers to the ecosystem. (Note that this is purely a consumer play; Apple has no compunction about charging for professional products such as Final Cut and Aperture.)

The impact of free iWork will be particularly interesting. These are all the productivity apps that most consumers and many small businesses need. Pages, Numbers, and Keynote do not have the power, flexibility, or complexity of Word, Excel, and PowerPoint. Features such as edit tracking and complex spreadsheet automation that corporate users find indispensable in Word and Excel offer little or nothing to home users or students. It’s difficult for me to see what value consumers will see in Microsoft Office for the Mac, which Microsoft is trying to sell as part of a $99 a year Office 360 household solution.[pullquote]While Apple may ignore Microsoft, Microsoft cannot afford to ignore Apple.[/pullquote]

While Apple may ignore Microsoft, Microsoft cannot afford to ignore Apple. iWorks offers a “good enough” productivity solution for iPad users. Microsoft, which cannot use hardware profits to subsidize free software, throws in key Office 2013 components–Word, Excel, PowerPoint, and Outlook–on its Surface 2 (the Windows RT 8.1 version.) But these are the standard Desktop versions and they are all but unusable without a keyboard and mouse. The iWork counterparts are stripped down, but are designed to be used on touch-interface tablets (though, admittedly, a keyboard is a big help if you are doing anything more than light editing of existing documents.)

We don’t know yet whether the Surface 2 will sell better than its ill-fated predecessor. But if Microsoft intends to continue using Office as a value proposition for RT table, it will have to redouble its efforts to produce true tablet versions. Microsoft is expected to offer new touch-first Office products next year, but so far has said little about their functionality or feature set and has yet to give a firm release date. Apple’s move just ups the pressure on the already deeply troubled RT effort. (Windows 8 tablets are a somewhat different matter, but I believe these are being marketed, and used, primarily as very light laptops rather than as true tablets.

Apple software policies will probably have little near-term effect on Microsoft’s corporate business, where it has been successfully migrating customers toward software subscription models. Long term, however,the pressure on prices can only be downward.

Of course, Microsoft is not the only competitor affected by Apple’s moves. The price of consumer software has already been sliding toward zero, with publishers relying more and more on in-app purchases and associated services for monetization. The trend is most advanced on tablets and smartphones, but has been spreading to traditional PCs since the advent of the Mac and Windows app stores. Here, too, Apple has upped the pressure.