How the Lion Deepens Apple's Moat

Apple (Nasdaq: AAPL  ) is preparing to release the next version of Mac OS X, called Lion, anytime now. Rumor has it that the new OS could arrive as soon as this week.

Like Snow Leopard before it, this major upgrade will be available at a very aggressive price point of only $29, and come preinstalled on all new Macs purchased after the release. Surely Apple has poured massive amounts of cash into developing Lion -- so how can it justify selling such important software for less than the price of the keyboard?

One word: moat. 

This lion eats invaders
Apple wants to immerse you in its iWorld, coaxing you into buying in (figuratively and literally) to its broad ecosystem. By letting you have Lion for next to nothing, the company strengthens its economic moat against competitors, and raises switching costs for customers in the event they ever consider defecting to Microsoft (Nasdaq: MSFT  ) Windows.

Google (Nasdaq: GOOG  ) has utilized this strategy with Android. Big Goo doesn't collect licensing fees or royalties from the software itself. Google gives away Android for free only to increase users' exposure to the ads it sells. For that same reason, everything Google offers is free to users; it all ties back into reinforcing the company's primary advertising business.

You'll notice that Apple also doesn't charge for iOS updates for the iPhone, iPad, or iPod Touch. The company is hoping for a two-fer, and it wants all users to adopt both iOS and OS X, since this combo would maximize the odds that the consumer would buy (and preferably upgrade every year) multiple iDevices instead of a Chromebook, Android phone, or Windows PC. And if you happen to decide to load up said iDevice(s) with goods purchased through iTunes, the iOS App Store, or the Mac App store, that would just be a cherry on top for Apple.

When you add in the iCloud service, which integrates all of your digital personal effects, a low-priced Lion makes a pretty strong incentive to sit tight and make yourself comfortable. As Apple's core business is selling hardware such as computers and mobile devices, this strategy boosts sales and promotes customers' coming back for more, year after year. Apple's ability to create a sustainable, growing, and recurring revenue base is one reason investors should stick around.

Fool contributor Evan Niu probably buys too many Apple products than is good for him or his wallet, but at least he is also an Apple shareholder. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services have recommended buying shares of Apple, Google, and Microsoft. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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