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Apple's Newest Strategy: Free

Adam Levy
October 23, 2013

Apple's (NASDAQ: AAPL) big event on Tuesday didn't have very many surprises. We got the expected updates to the iPad and Mac product lines; the new OS X update didn't have anything we didn't see at the developers conference in June. What was surprising was that Apple decided to give away OS X Mavericks for free and its next generation of iWork and iLife come free with the purchase of a new Mac.

Source: Apple's Keynote Presentation.

This is the power of Apple. Microsoft (NASDAQ: MSFT) couldn't give Windows away. Not even Google (NASDAQ: GOOG) gives away software like this. Apple's position as an integrated hardware/software company makes giving away its software potentially more profitable than selling it.

A loss leader
Giving things away for free or lower than cost appears to be a new trend at Apple. It previously sold upgrade licenses for OS X for $19.99, one-tenth the typical cost to upgrade Windows Pro. Apple's probably not making money on these upgrades considering it has less scale compared to Microsoft. Microsoft sold 100 million licenses for Windows 8 in its first six months compared to Apple selling just 28 million copies of its previous iteration of OS X, Mountain Lion, over the last year.

Earlier this year, Apple unveiled iTunes Radio. It almost certainly takes a loss on the service as music streaming is notoriously difficult to make a profit on. Just ask Pandora.

Now, it's giving away its best software. The idea is that providing its customers with the best possible experience for one simple price will help sell more hardware. The software is already priced into the hardware.

Everyone wants to be like Apple
Google has long championed the strategy of giving away its software in order to draw more people to its lucrative advertising business. The strategy has been rather successful for the company, but it's not nearly as powerful as Apple's strategy.

Apple controls the margins on its hardware products, whereas Google is susceptible to the market's demand for ads. While more eyeballs on Google ads is certainly great for the company, there's some market r