Oct 24, 2013 (06:10 AM EDT)
Apple Embraces Free: 5 Reasons Why
Read the Original Article at InformationWeek
This was the most surprising aspect of the company's media event Tuesday, at which Apple introduced improved versions of its iPad, iPad Mini and MacBook Pro, in addition to previewing its redesigned Mac Pro desktop workstation, slated to ship in December.
Apple is not known for charitably foregoing opportunities to profit. When co-founder Steve Jobs returned to Apple in the mid-90s to resume his leadership of the company, he did his best to restore Apple's revenue stream, and he did so with profit margins that remain the envy of competitors. Thus we have the $29 Apple Lightning to 30-Pin Adapter, something that a Chinese manufacturer could make for a few dollars if Apple allowed it.
But charging for subscription services like .Mac (2002-2008) and later MobileMe (2008-2011) has proven to be more problematic with consumers than overpriced peripherals, because those online services were overpriced compared to alternatives and didn't perform well enough to justify the cost.
On the Web, free is the price to beat. As a 2007 study from researchers at Duke University, MIT and the University of Toronto noted, "people appear to act as if zero pricing of a good not only decreases its cost, but also adds to its beneﬁts." In other words, offering a product for free magnifies its perceived value.
Here are five other reasons Apple is embracing free.
1. Apple Must Respond To Google
No wonder it's hard to compete against free, which is to say Google. Since coming to dominate the world of online advertising a decade ago, Google has used its ad revenue to subsidize its software and services, much of which it offers at no charge. Other online companies, such as Facebook, have also seen the light.
The trend was astutely skewered in Elvis Costello's acerbic song "No Hiding Place" (2008) about the diminution of privacy. He sang, "In the not very distant future / Where everything will be free / There won't be any cute secrets / Let alone any novelty."
[ In Apple's model, hardware is still premium priced. Read Apple's New iPads: Worth The Price? ]
Everything isn't free yet, but Apple evidently sees the need to get with the program. Google wasn't always a threat. Then came Google Apps and Gmail, Android and Google Play, Chrome and Chrome OS. The playbook that Apple used to thrive in the shadow of Microsoft needs to be rewritten.
2. Software Costs Nothing
If China tries to sell steel below cost, the U.S. may accuse it of predatory pricing or dumping. Software doesn't work that way. When Apple decides to give away its OS X Mavericks, the iLife apps and iWork apps, while taking a swipe at Microsoft for charging customers for software, that's just the way the game is played.
Google's fondness for free isn't the only factor in Apple's decision. Free open source software has long put pressure on software developers who would sell their code. And then there's the inherent absurdity of paying over and over again for the same basic functionality. Microsoft Word first appeared on the Mac in 1985. Despite the various bells and whistles added over the years, it remains at its core a word processing program, something that really ought to be a commodity by now. Imagine a typewriter that you had to buy every two years; you get the picture.
Apple itself has been instrumental in driving the cost of consumer software down. It dropped the price of what were once known as pro apps like Final Cut Pro from $1,000 to $300 when it shifted to distribution through its Mac App Store. The iTunes App Store has seen the average price of iOS apps fall over time. In 2010, 84% of apps were free, according to metrics firm Flurry. As of April 2013, 90% were free and the average iOS app price was $0.19. For Android apps, the average price at the time was $0.06.
In the not very distant future, software will be free, and revenue will come from in-app purchasing and advertising. For many developers, the future is now.
The world of free online services, however, comes with a cost to individuals and businesses. Individuals pay by surrendering their time, attention, bandwidth and personal information to advertising firms and by working as unpaid creators of social networking content that will frame ads or become advertising itself. Businesses pay by undermining the viability of traditional business models.
Earlier this month, Dan Counsell, founder of Realmac Software, lamented that the pricing expectations created by Apple's Mac App Store were unsustainable for his company and declared that the $50 his company is asking for its Ember graphic design app represents a fair price. "If companies keep selling software at bargain basement prices without a large enough market, it doesn't end well -- they go out of business and if that happens, the very people who love great apps lose too," he wrote.
Apple CEO Tim Cook remarked on Tuesday that his company had paid out $13 billion to iOS developers since the App Store opened. In August, Forbes estimated that over a year, the average revenue per iOS app comes to $4,000 and the average revenue for an iOS developer comes to just over $21,000. A 2011 survey found that only 25% of iOS developers had earned more than $30,000 lifetime total revenue selling games on the App Store. Cook's claim would sound less impressive if it were framed with words like, "A quarter of our developers earn enough to live on."
Perhaps software costs next to nothing because it's mostly worth nothing -- few apps are indispensable. Or maybe it's that Apple benefits disproportionately to the value it returns to its developers -- Google's Chrome Web Store gets by with 10% of revenue rather than 30%. Either way, the real money flows to Apple and other platform operators, to those that collect a percentage of every sale and sell gold-rush dreams to developers.
3. Apple's Future Is Cloudy
Consumers may no longer want to pay for content, whether that's software, music or other forms of media. But they'll pay to store their free digital assets, their photos and their files. By giving away OS X Mavericks, iLife and iWork, as it does with its iOS updates, Apple encourages customer engagement with its iCloud services. Apple has made iCloud into its version of Google Apps, Google Drive and Gmail.
As a result, Apple can look forward to a growing revenue stream from subscription services like storage and digital content sales. And hardware upgrades become almost painless when user data lives in the cloud instead of on the device. Apple already earns almost as much from iTunes/software/services as it does from selling Macs. Its iTunes service business grew 25% year-on-year in Q3 2013, while its Mac business slipped 1% during the same period.
Better still, through the iTunes App Store and the Mac App Store, Apple managed to decouple software from devices by linking apps to Apple IDs. A few years ago, Apple urged Windows users to switch to the Mac. And back then, you really did have to switch, abandoning your PC to start afresh with a new Mac. Things are different now. You may be able to get rid of your Mac, but you remain an Apple customer through your Apple ID. All your software remains, waiting for you. The cloud runs on the "Hotel California" business model: You can check out any time you like. But you can never leave.
Apple, of course, is a hardware company, too. But hardware is a hard way to make recurring revenue. Device owners may keep using their gear for years without paying again. And there's no guarantee that consumers will continue to replace their phones or tablets as frequently as they have been. Subscriptions, advertising and collected data promise predictable revenue to complement Apple's cut of app sales. Being a forward-looking company, Apple is focusing on the cloud as the way to connect its customers to the tech industry's next big thing: wearable devices.
4. Apple Isn't Giving Up On Ads
Competing against Google means being in the ad business. Apple is in the advertising business, but hasn't been doing particularly well. Part of the problem was that when iAds launched in 2010, then-CEO Steve Jobs wanted iAds to carry ads as well-crafted as Apple's products. Apple sought large advertisers that could commit large sums to fulfill its minimum buy-in. The strategy didn't work and iAds has frequently been described as a failure.
Of course, Silicon Valley loves to characterize failure as a stepping stone to success, mainly because it's a great way to convince investors to keep their wallets and purses open. But for Apple, with more cash than it knows what to do with, there's also some truth to the saying. The company took another stab at advertising in June with the launch of iAds Workbench. The price of admission for this new form of iAds is $50 instead of $500,000. If Apple can figure out how to offer advertising for free, then Google will really need to worry.
5. Apple Smells Blood
As strong as Google may be at the moment, Microsoft is weak. It's looking for a new CEO who can do what Steve Ballmer could not. About the best thing that can be said of its mobile effort is that it's doing better than BlackBerry and Nokia. Gorged on profits from Windows and Office, Microsoft became complacent and is now scrambling to remake itself in the image of Apple, the company it once saved with a $150 million investment and a promise to keep making Office for the Mac.
Rather than returning the favor, Apple senior VP of software engineering Craig Federighi on Tuesday declared, "The days of spending hundreds of dollars to get the most out of your computer are gone." On the projection screen behind him, the image of Microsoft Windows 8 Pro, priced at $199, shattered into pieces.
Microsoft's business customers won't abandon Windows and Office overnight. But with Office still not available on Apple's iPad, more and more business customers sold on the iPad will settle for Apple's iWork apps, Pages, Numbers and Keynote, and perhaps even come to prefer it. The price, after all, is right. And these are customers Google covets -- business professionals accustomed to paying for technology.
Apple may be sold on free, but rest assured, someone's going to pay.