Apple products are usually seen as expensive if not out of reach for average consumers; rarely are they associated with being free. But today the company took a big step toward changing that perception at a splashy event in Cupertino. "For the last several years, we've been on a mission," Apple SVP Craig Federighi said on stage, "[and] today we're going to revolutionize pricing."
Apple's event on Tuesday went mostly as expected: Tim Cook boasted of the company's booming sales while criticizing the competition; Phil Schiller talked up Apple's commitment to quality and its stateside manufacturing initiative for the Mac Pro; and Jony Ive helped introduce the new, ultrathin iPad with a classic Jony Ive-ism, saying, "There's a simplicity to it, but there's nothing precious about it." But when Federighi flew on stage to highlight Mac OS X Mavericks, he made a surprising announcement: Apple's new operating system would be free—a move that could have significant connotations not only for Apple but for the PC industry as a whole. Federighi himself called it "a new era for Macs."
Traditionally, PC and software makers have made significant revenue from either licensing OS software or using it to attract new customers to purchase hardware upgrades. Whereas mobile software has typically been offered for free—there's no charge to upgrade from iOS 6 to iOS 7, for example—Apple and Microsoft have long charged fees for upgrades to Mac OS and Windows. The previous iteration of OS X, Mountain Lion, cost $19.99; Microsoft's Windows 8 can cost anywhere from $119.99 to $199.99.
Today, Apple blew up that antiquated model, bringing its desktop operating system pricing in line with its mobile OS. Now, even if you're on an OS as old as Snow Leopard or on a device purchased in 2007, you can still "in a single step update...to Mavericks" for no charge, Federighi said, adding, "Free is good."
For Apple, the benefits likely outweigh the downsides. While Apple generated revenue from selling OS X, it had been lowering the price of the product over the last few years in order to goose downloads. By offering it for free, Apple will potentially further mitigate issues of fragmentation. When more and more users upgrade to Mavericks, because it's free, Apple users will more and more operate on the same standard, enhancing the platform's security while boosting app compatibility.
The largest benefit to Apple, however, could come through the disruption it might bring to Microsoft's business model. Last year, Redmond brought in $19.23 billion from the Windows division, with 65% of that coming from licensing its operating system to OEMs. With Apple offering its sleeker, better-reviewed operating system now for free, Microsoft's pricing for Windows—both to average consumers and enterprise customers, as well as possibly OEMs—will seem outlandishly high by comparison.
Though it's unclear whether this represents a long-term change in policy for Apple, with all its future Mac OS upgrades remaining free, it's easy to see how this pricing model would be appealing to the public. Imagine a corporate IT buyer choosing between purchasing Macs and Windows-based PCs for employees. Certainly, PCs are likely to remain cheaper up front, but now they might seem significantly more costly to maintain over the years. Rather than have to upgrade from XP to Vista to Windows 7—with all the associated headaches and expenses—a new Mac can stay as fresh as possible without putting a hole in your wallet.
The cost of upgrading Windows is one reason why Microsoft has so many fragmentation issues. The latest version of Windows has just an 8% adoption rate among Windows users; XP and Windows 7 are still the dominant platforms, with a whopping 77% market share. That's a pain for developers, who don't want to design apps for a new OS which so few have gravitated toward—not to mention a nightmare for Microsoft, considering that so few customers think upgrading Windows is worth the price tag.
Apple also decided to make its iLife and iWork productivity suite free, another headache for Microsoft, which continues to generate significant revenues from its Office suite of products. Certainly, Apple's productivity suite doesn't have the adoption rates of Microsoft's Office and Excel programs. But by offering its suite for free, Apple—of all companies—makes Microsoft look greedy for deciding this year to start charging for Office 365 on an annual subscription basis: $99 per year. As Apple executive Eddy Cue snarked, "Others would have you pay a small fortune" to use their software.
Of course, Office certainly has a strong grip on the consumer and enterprise market, and Windows continues to dominate the PC industry. But with prices for these digital products spiraling toward nothing, Microsoft and its OEM partners will be even more squeezed to produce differentiation. And right now, with declining margins, selling cheaper, lower-quality hardware simply won't cut it anymore, especially as the PC industry continues to get consumed by the mobile market.