How Apple is playing hardball with Microsoft

Tucked in amongst Apple's several hardware debuts last month was the announcement that the company would stop charging for its OS X and iWork office-suite software. Why is Apple willing to forgo this small revenue stream? How might it affect IT buyers? The move is an interesting one on several fronts.

Although Apple has been a software vendor for a long time, it thinks and acts more like a hardware company. And given its large hardware margins, why not? On the same day it made software free it also announced cuts to some of its most popular Mac hardware. Over the course of 2013, Apple has reduced the average selling price of Mac computers by about $150. The addition of free business-oriented software heightens the perceived value of Apple's computers, which may be a bid toward increased market share. I'll return to this point in a moment.

It can be argued that Apple making OS and office-suite software free follows a strong trend toward free software in the burgeoning mobile market. After all, iOS has been free for a long time. Clearly, Apple wanted to put OS X and iOS iWork apps to in one code base, a logical step that requires the two platform versions to have identical feature sets. Among other things, that lets Apple devote fewer software engineering resources to the iWork effort.

A free Mac operating system means faster user adoption, which in turn spurs app development for the newest versions of the OS. Net Applications' data show that 11% of all Macs were already running OS X 10.9 Mavericks by the end of October. According to Computerworld senior reporter, Gregg Keizer, that's the fastest start of any OS X upgrade.

Those are some key internal reasons why Apple is making some of its software free. The much more interesting scenario plays out around the external reasons. Apple is blowing Microsoft's doors off on mobile market share. The long-time roles of these two companies have reversed: Microsoft's not only losing the mobile OS war, winning is a long shot at best. And Apple is playing its position to the hilt, trying to disrupt Microsoft' s business model. At first I wasn't sure this was really happening, but the evidence shows that it is.

The Ballmer announcement, the faltering of Windows 8 and Surface Pro and the tiny Windows Phone installed base are just some of Microsoft's recent failures. Apple is subtly kicking Microsoft when it's down. It' s no coincidence, for example, that barely a month after Microsoft announced that Windows 8.1 upgrade, Apple responded by cutting all charges for OS X and iWork.

Apple is framing its market position and value proposition for both i-devices and the Mac against those of Microsoft and Google. Not only is Apple not going to lease its mobile and desktop business suite software for $100 a year, it's offering them for free just like Google. The iWork apps may not be up to a comparison with Microsoft's Office 365, but they make the Google Docs apps look like toys.

What's more, Cupertino seems to be pressing for increased Mac market share. Over the last couple of years, Apple has gotten cozier with enterprises. The iPhone and BYOD have made for a much stronger Apple presence in corporations. The big barrier to enterprise entry for the Mac is the total cost of ownership (TCO). Picking up from that earlier discussion about raising the perceived value of the Mac ... lowering prices, bundling free business applications and offering free OS updates all decrease the Macintosh's TCO, potentially making it more attractive to IT buyers. Smart buyers will factor in the Mac's security and reliability advantages.

For Apple to make eliminating the charge for iWork effective, it must make its office suite come closer to the rich functionality offered by Office 365. For previous owners of iWork on the Mac, the new free OS X version takes a serious step back because of the reduction of features required to sync it with the iOS iWork code base. Apple needs to return those features to users. (Indeed, Apple recently announced that it would restore some of them.) In particular, Pages needs to be able to save to .RTF format. Apple does have an honest chance to gain a foothold in office suite market share. But simplicity doesn't "sell" with this type of software.

Meanwhile, Microsoft needs to do something difficult for a software company to do: rethink the way it charges for software. It's not clear to me that the lease model will work. I've seen far too many businesses and individuals using five-year-old office-suite software. The expectation that people will pay $100 a year just to stay current is unrealistic. Microsoft needs to find a way to innovate with business software, not shuffle features and user interface around. It needs to charge less for software, because that's the world we're in now.

Apple was always playing in the minor leagues when it came to desktop OS, PC hardware and business applications. Microsoft's, of course, led the Majors. But times have changed. Now Apple's in the catbird seat. Let's see if they can capitalize on it.

Scot Finnie is Computerworld's editor in chief. You can contact him at sfinnie@computerworld.com and follow him on Twitter ( @ScotFinnie).

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