Apple Drives Consumer Software Prices to Zero

Steve Wildstrom / October 22nd, 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.1 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.

While Apple may ignore Microsoft, Microsoft cannot afford to ignore Apple.

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.

  1. 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. []

Steve Wildstrom

Steve Wildstrom is veteran technology reporter, writer, and analyst based in the Washington, D.C. area. He created and wrote BusinessWeek’s Technology & You column for 15 years. Since leaving BusinessWeek in the fall of 2009, he has written his own blog, Wildstrom on Tech and has contributed to corporate blogs, including those of Cisco and AMD and also consults for major technology companies.
  • ThierryL

    Software cost for Final Cut, Logic and Aperture is also way down. Compared to their direct competitors it’s a no-brainer. I was reading John Kirk’s article about IT dept the other day, and if what he says is true then companies have potential new savings to make if they go the Apple way (Office, Acrobat Pro, …) and we should now see a migration. But ain’t gonna happen; IT dept are the real obstacle to Apple in the enterprise in my opinion. I have yet to see a job offer where ARD is mentioned around here… It’s a cultural thing, if you’re MSDE, then Apple ain’t gonna make it on your turf. And if software cost mattered all that much then Linux would have a greater position don’t you think? (unless maybe if you live in Denmark). I still don’t understand why states and corporations did not go the Linux way at some point. They pay millions of dollars every year for the same code!

    • steve_wildstrom

      Prices on the Apple pro creative software have come down, but are still significantly non-zero. They’re cheaper than competitors from Adobe, but Adobe continues to sell, largely because of the breadth and integration of the Adobe suite and the huge investment creative pro have in Adobe products.

      You’re right. For business and even independent pros, upfront software cost can be a small part of the purchase decision. Not so with consumers.

      • Shameer Mulji

        You also forgot to mention that Adobe’s software is also cross-platform. There are many pros using Windows & Macs.

        • steve_wildstrom

          Actually two important things about Adobe I didn;t mention. One is that not only are their apps cross platform but they look and work essentially the same on both Mac and Windows. Second, within the limits of different functionality of different Creative Suite applications, they use as many common UI functions as possible, making it relatively easy to learn a new app after you know others.

          • obarthelemy

            Also, Apple seem to be playing feature roulette, with new versions often enraging users by missing features from the previous versions. Adobe aren’t doing that, and seem a safer horse to be rinding, long term.

      • Idon’t Know

        The Apple Pro software is a third of what it was and if you buy one copy on the App store you can share it with as many computers as you want. That’s a pretty big deal. Meanwhile Adobe continues to be very slow to update, fix bugs, shackle customers ever tighter, and in general is annoying as hell to deal with. Reminds me of Quark xpress years ago and where are they now.
        Oh and upfront software costs are a huge part of the software decision for both large and small companies as well as long term costs.

    • Stephen Gooden

      Mostly agree with you. I have a few colleagues in the Finance sector (IT engineers/managers) who actually deploy macs/ipads in there environment. Albeit they are small and tend to be driven by the staff than by IT staff directly :-). But you are definitely right in regards to government and corps still relying on Windows when free and very usable options are there. If it was up to myself I would be running a hybrid environment with both Linux and Windows.

    • Nangka

      IT managers just want some one to point finger at when things hit the fans. They will gladly pay to protect their behind, and MS simply obliges. Free means the buck stops at their desks.

  • Defendor

    This definitely makes Macs a much more attractive family machine. You now get everything a home user would need free, and most future upgrades are free as well.

    Home users don’t need office. They just need basic suite capabilities. Even iWork is likely overkill for most home users.

    Throw in cloud/iOS inter-working with the same free applications and you have a really kick ass ecosystem.

    Apple is really making all the right moves, I like everything they are doing except iOS 7.

    • TheEternalEmperor

      Boy, you just won’t let that iOS7 thing go. May as well learn to love it. It is here to stay.

      • Defendor

        Sorry I am not a automaton that just automatically likes everything Apple does.

        • TheEternalEmperor

          I don’t recall saying that. I don’t like everything Apple does either, but I also don’t feel it necessary to mention what I don’t like with every post no matter how off-topic.

          But if venting gets you *quickly* through Anger, then Bargaining, then Depression, and finally Acceptance…play on. 😉

          • Guest

            I also don’t write diatribes attacking people for a simply one sentence statement of opinion.

          • TheEternalEmperor

            That you Defendor? Hardly an attack. I just think you are firmly entrenched in this “I don’t like iOS 7.” stance.

    • obarthelemy

      OpenOffice has been available for free on Mac and Windows for ages.

  • tady

    When listed above apps will be available for free on iOS? I just have checked on my iPhone and Keynote, Pages, Numbers are for 8.99EUR each.

    • Glaurung-Quena

      Ilife and Iwork are free if you buy a new device. If you have an old device, they’re the same price as before. (sad face)

      Mavericks, however, is free regardless of the age of your computer — if it’s running Snow Leopard or later, upgrading is now free (and you can buy a Snow Leopard DVD from Apple for $20, shipping included. Which does not prevent scam artists from selling it on ebay for more than that).

    • TheEternalEmperor

      Go to featured, Apps made by Apple and you’ll see them for free if you are on a new device.

    • Idon’t Know

      Are you on iOS 7? It downloaded on all of my devices. But you are outside the U.S. so it may be different.

  • David Olson

    But this isn’t really zero, is it? If I talk to somebody at Best Buy who doesn’t know much about tablets, I would point out the value of Pages, Numbers, etc., as a reason the apparently higher priced iPad is really more economical. You get first class hardware, top software and best in class ecosystem. There is a dollar amount we talk about and I argue the cheaper tablet is too expensive.

    The different elements in computing hardware, software and ecosystem are like the varied elements involved in grocery shopping. All stores advertise their loss leaders. You can only tell the cost at the checkout and the value when you cook and taste. There are good reasons why people who can shop at the best stores. Junk food is very inexpensive but healthy, fresh organic food is expensive but worth it.

    And last, it still seems significant what motives people have in trying to sell me their stuff— where do they really get their money from? Apple makes money from hardware and its noble mission is to change the world with bicycles for the mind. Google makes money from advertising and its noble mission is to make information accessible. Microsoft makes money from facilitating the workings of government and big business and I don’t know its noble mission. Each company is giving things away to make their money and further their noble mission. The challenge for the consumer is to not be swayed by the loss leaders and evaluate the total package.

    • TheEternalEmperor

      Have to disagree with you about Google. Their “noble” mission is to collect data on you. Accessible information just helps that.

    • Idon’t Know

      The answer is yes the cost is zero. Despite your long winded nonsensical attempt to say..I don’t know what exactly.

    • Nangka

      “Microsoft makes money from facilitating the workings of government and big business and I don’t know its noble mission.”

      Lol. Looks like Frank Shaw hasn’t been doing a good job.

    • obarthelemy

      Except Google and MS also include similar apps with their tablets: Google have QuicjOffice and Docs, MS includes Office on WinRT tablets (not on Win8)

  • James King

    Two observations that I take from this post:

    1) Apple will never move to commodity pricing. The value add of this magnitude has to have a pretty high cost. Apple has no choice but to continue to maximize margins to fund it. Not a bad deal as long as its competitors are inept. But if any of them start to show real competence in UI/UX, this could affect Apple in the future. It’s a good bet that probably won’t happen but you never know;

    2) If I was a software developer, I’d be very worried about the direction the industry is going. This is similar to the “bundling” strategy Microsoft has used to gain a stranglehold on the PC market. It’s great for the company that can pull it off but the repercussion to the rest of the industry will likely be negative. Real innovation in the PC space ground to a halt once Microsoft and Intel won. What will be the effect of the commoditization to zero of software?

    I don’t see how an industry can sustain itself charging nothing for something that can take hundreds to tens of thousands of man-hours to build. Sure Apple has its hardware to cover the cost. Microsoft has its Windows/Office monopoly to cover the costs (plus its dominance in the enterprise). Google has its ad business to cover the costs. What do pure software developers have?

    Though Windows had what could be called a robust ecosystem, the way it worked was as a simple platform. When a developer created a product, people came to value the product on its own merit and paid for the privilege. However, that is no longer the case with modern “ecosystems.” The way things are structured now, all software is essentially a value add for the ecosystem. Apple, Google, Microsoft and Amazon control the gates. Here’s the real interesting part: though the compete with one another, all of them can exist INDEFINITELY in this state. Though they are competitors, the reality is that the differences in their business models largely shields them from each other. However, as a software developer on the bottom tier of the ecosystem, there is nothing but fierce competition which makes it almost impossible to charge a premium for your product. Real differentiation is almost impossible because you are largely using the same UI widgets as all of your competitors. And, even if you have a great idea, it can easily be bird-dogged by another developer who simply charges less for it. In the end, the situation is one great race to the bottom. The way this plays out, software development is simply a value add for someone else’s ecosystem. On top of that, you are competing against the very platforms to which you are adding value. What software developer can compete with Apple, Amazon, Microsoft or Google on their own platform? Who in their right mind would attempt to create a competitor for iWork or iLife and how successful would it actually be if someone did? The best part of controlling the gate is that you get to decide who enters and everyone who enters has to pay a toll.

    As far as I can see, the only way this doesn’t eventually eat software development, there have to continue to be players who create pure platforms instead of “ecosystems.” I would consider Firefox OS a pure platform as I would the Linuxes. In the end, there has to be a software platform for which people are willing to pay or has a business model that allows it to remain a pure platform rather than an ecosystem. The only way that is likely is someone investing in innovating the state-of-the-art in UI/UX. In other words, an Apple for software. The same engineering-driven software development won’t cut it. If not, then I expect software development to become the Information Age’s new sweatshop.

    • TheEternalEmperor

      Look at this way, Apple may give the software away, but

      1) You’ve got to hire software devs to write software whether its given away or not.

      2) There has been free software since the dawn of software. Apple, Google, MS bundling seems to be just the latest. Some of my favorite software is free or open source. I like Spring, HIbernate and OpenOffice. I still pay for my IDE, Intellij Idea, and Quicken.

      3)There are many different types of software development under the sun. Productivity tools is just one type.

      I have no fears about the industry. Technology marches on, new use cases arise, the need to layer software on top of technology seems to be increasing(look at our “phones” for pete’s sake) and the number of people who want to use tech far outpaces the number of people who create it.

  • Idon’t Know

    Microsoft is so far behind in smartphones and tablets. Amazing lack of vision.

  • Air_Cav

    I have to rally to Steve’s argument. Frankly I hadn’t thought of it this way and it makes a lot of sense. iWork is more than enough for most people and now I am out of the corporate world they are fine for me, so Microsoft does have a worry when people figure this out (even at $60.00 for the three key apps it is pretty inexpensive).

    Adobe, well another story. I am an avid user and most of my image workflow is around Lightroom 5 and CS6. However with Adobe going to the subscription model and recently sending me a free id tracking service offer because of their poor security I am not as enamored of them as I once was. I hope they drop the stupid subscription model and go back to the old model.

    All in all a canny, strategic move by Apple.

  • Defendor

    One fly in the free iWork ointment. I appears Apple culled a lot of useful features in their move to free:

    https://discussions.apple.com/message/23488122#23488122

    It looks more like in the interest of streamlining, they ported the cut down iOS version to OSX, much to detriment of previous users who depended on advanced features.

    • obarthelemy

      I think it makes sense: most users need wordpad-level features. For anything above that, hopefully some devs will find a market shorn of all entry-level users still worth serving nonetheless ?

  • obarthelemy

    One thing for sure:
    – Apple just killed the entry-level market for other devs of Mobile suites
    – This move is baby steps to displace MS and Google.

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