Why Apple Is Embracing the Power of Free; A Shift to Giving Away Software Could Help Tie Users to Device Ecosystem

Why Apple Is Embracing the Power of Free

A Shift to Giving Away Software Could Help Tie Users to Device Ecosystem

DAISUKE WAKABAYASHI and IAN SHERR

Oct. 23, 2013 7:36 p.m. ET

Apple Inc., AAPL +0.98% famous for charging a premium for hardware, is embracing the marketing power of free. The company surprised the industry on Tuesday by saying it would make many of its most-popular software programs, including the latest version of its OS X operating system, free to many users. The move is a shot across the bow at rival Microsoft Corp. MSFT -2.37% But it can also help Apple tie users more tightly into its ecosystem of devices, applications and content.“What they’re concerned about is getting people exposed to their applications and ecosystem, and getting them aware these apps run on your Mac, iPad and iPhone, and it all syncs automatically,” said Van Baker, an analyst at Gartner.

Apple’s move is part of a broad shift in technology, away from treating software and hardware as separate products. That concept underpinned the personal-computer industry for decades and made Microsoft, at one time, the world’s most-valuable company.

With the rise of smartphones and tablets, however, a growing number of tech firms are adopting an integrated approach as a way to improve the user experience.

That includes Microsoft, which began selling a new version of its Surface tablet this week and is also in the process of completing a $7 billion acquisition of Nokia Corp.’sNOK -0.82% handset business. Microsoft’s push into mobile hardware—unprofitable so far—is bankrolled by its extremely lucrative PC- software business, which still accounts for the lion’s share of its profits. In a blog post Wednesday, Microsoft communications executive Frank Shaw said its Office suite of workplace applications is included in Microsoft’s newest tablets.

Unlike Microsoft, Apple’s roots are in selling hardware. It always viewed software as a way to differentiate its products in order to charge a premium for its hardware. That was most true with the iPhone and iPad, where free software updates became a way to keep its products ahead of rivals in the intervals between hardware changes in the fast-moving smartphone and tablet world.

Now it is further extending that model on its devices, and to its Mac line of PCs. Apple Tuesday said it would offer free upgrades to its latest OS X, known as Mavericks, that work with most Macs made since 2007. The company also said it will no longer charge for its two main application-software suites for new Macs, iPads, iPhones and iPod Touch devices. Those suites, iLife and iWork, handle photo, video and music organizing and editing, as well as workplace applications.

“The days of spending hundreds of dollars to get the most of your computer are gone,” said Craig Federighi, Apple’s senior vice president of software engineering, at the press event on Tuesday.

Prior to this week, Apple charged for major software upgrades to Macs. When the company introduced the previous version of OS X, Mountain Lion, it charged existing Mac users $20 for the upgrade. It also required existing customers to pay for new versions of iWork and iLife.

Apple customers have historically upgraded their software more quickly than other users, despite any cost. In June, Apple said 35% of Mac users had upgraded to Mountain Lion just a year after its release. By comparison, only 8% of customers have upgraded to Windows 8, the latest version of Microsoft’s operating system, since its launch last year, according to Net Applications.com.

But the Mac adoption rate pales in comparison to that on iPhones with their free software. In June, CEO Tim Cook said that 93% of iPhones had the latest operating system at the time, iOS 6, about nine months after it was released.

Offering updates to OS X for free will allow customers who ran computers with older software to have access to the latest features of iCloud, Apple’s storage and data-synchronization service. The service could encourage users to buy more Apple products because it is designed to connect devices.

ICloud technologies like password and document syncing, as well as a feature that can remotely track and erase a stolen laptop, also could persuade customers to stick with Apple’s products in the future, analysts say.

Another benefit of offering free upgrades, analysts say, is to give more users the same experience. The vast majority of Mac owners, for example, are still split among three versions of OS X, according to research firm Chitika Insights. Since users were dealing with different operating systems, it made software development more complex. Shifting as many customers as possible to the latest software cuts down development costs, allowing Apple to focus on building new features that would attract even more customers.