Something rather curious has happened within Apple's (NASDAQ: AAPL ) iTunes, software, and services segment over the past few years: it started generating operating profits.
Apple has long maintained that these divisions operate near breakeven, but Asymco's Horace Dediu crunched the numbers recently and estimates that the segment may be generating over $2 billion in operating income per year. Apple's first-party software offerings are mostly responsible for the segment's recent profitability. That includes products like iWork and Apple's wide range of professional software applications like Final Cut Pro.
That means that Apple could possibly afford to give some back if it's feeling generous. The Mac maker's main motivation for doing this would be to strengthen its complementary ecosystem that drives profitable hardware sales, which was always the strategic purpose of iTunes in the first place.
Apple's been working hard to integrate iWork into iCloud for a while now, which is a free service. The company recently showed off the iWork for iCloud beta at WWDC last month, as a cloud-based productivity suite that could compete with Google Docs and Microsoft Office 365 to a small extent. With iCloud being a free service, Apple could make a wide range of its first-party apps free to bring pricing parity.
There's other evidence to support this theory. There are hints within early builds of iOS 7 that apps within Apple's iWork and iLife suites for iOS are going to be offered for free. Apple's iOS apps carry premium prices in the App Store, ranging from $5 (iLife apps) to $10 (iWork apps) while there are plenty of alternatives for $0 to $1.
On OS X, iLife is included on all Macs, while iWork costs $60 for all three components. Let's be clear, though: Office is the gold standard and iWork is a minuscule fraction of the market. iWork is not a meaningful player in the enterprise, and could arguably be considered geared toward average consumers.
With that in mind, Apple could conceivably make iWork on Macs bundled for free like iLife and not sacrifice too much revenue. Giving away the consumer-oriented software for free on all of its platforms would be a nice perk to boost hardware sales. The professional software would still be sold at premium prices and help cover the cost of giving away the consumer software.
That would simplify Apple's pricing, making iLife and iWork free on OS X, iOS, and iCloud all at once, while putting a little bit of pressure on Google and Microsoft at the same time.
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