Apple missing golden .Mac opportunity

If you're buying a computer to get onto the Internet, don't you think you'd be interested in a service that makes that computer much easier to use with the Internet?

Over the last five years, people have grown more accustomed to storing personal photos, documents, and files in the "cloud," rather than on a hard drive in their home. At the same time, they are buying Apple's Macs in larger numbers than ever. The company's answer to this trend has been its .Mac service, a $99-a-year collection of online tools released in 2002 featuring 10GBs of file storage, Web site hosting, and photo sharing, among other things.

Apple has designed .Mac to work very closely with its Macs, and updated it last year with additional storage and hooks into the latest version of iLife. But Apple charges far more than competing online services, which offer many of the same services for free or for a nominal charge. Combined with the fact that Apple is not an Internet brand, and it's not surprising that .Mac is an afterthought.

Of course, Apple's financial performance isn't exactly hurting these days, so it's not like .Mac is a huge drain on the company. But the company is letting price get in the way of a service that could be a unique selling point for its hardware: the real profit engine at Apple.

Viewed on just the features alone, $99 a year is hard to justify for the .Mac service. 10GBs of storage? I can get that for $20 from Google, and I can get much more if I want it. Photo sharing? I can do that for free on Flickr, and upload as many photos and videos as I want for $24.95 a year. Build my own Web site? Lots of services offer that capability for free.

The value in .Mac only comes into play if you're a Mac user, since the tight integration with the iLife suite of software found in every Mac is the key pitch for the service. Sure, you could cobble together a suite of similar Internet services for maybe $40 or $50 a year and just run them through your browser, but if you're going to use iPhoto and iWeb anyway, why bother?

For example, you can always share your photos with the world via Flickr by uploading them from your Mac's hard drive, but you can publish them to your .Mac Web Gallery with a single click inside iPhoto after importing them from your camera. Or, you can pull your .Mac Web Galleries right into a Web page created with iWeb, rather than pulling the files individually from your hard drive.

Despite that, not even that many Mac users find the service valuable. Apple's installed base was estimated at around 23 million users last October. If all those users were paying $99 a year for .Mac (which is impossible, since some percentage of those users are still on Mac OS X 10.3, not supported by .Mac), Apple would add around $2 billion in revenue a year. The entire "Software, Service, and other sales" category that includes .Mac revenue accounted for $529 million of Apple's $7.5 billion in revenue during its most recent quarter, and Leopard upgrades had to count for a healthy portion of that.

Apple is clearly managing to convince more computer buyers than ever that Macs are a compelling option, but it's failing to persuade those same buyers that .Mac is worth $99 a year. The company is missing out on two converging trends--a life spent online and surging Mac sales--to use .Mac as a selling point for the Mac, or to get the increasing number of Mac users onto the .Mac service and therefore transformed into a recurring source of revenue.

Might it make .Mac free, as suggested by Silicon Alley Insider's Dan Frommer a few weeks ago? The three major Internet players of our time--Google, Yahoo, and Microsoft--offer basic services for free. And for nominal fees, they offer almost the same amount of storage and sharing abilities as .Mac, such as Flickr's $24.95-a-year deal for unlimited uploads of photos, or Google's 10GBs of storage for $20.

A free .Mac service could be nothing more than a loss leader designed to sell Macs and iPhones. Apple clearly isn't making a ton of money anyway on .Mac, so the incremental revenue lost by making the service free might not even be noticed if that free service is used to sell Macs in greater numbers. A mass of online .Mac users could also have any number of implications inside the social-networking or content-delivery industries, such as free downloads for .Mac customers who visit the iTunes Store or more sophisticated online user forums and communities.

It's not just about Macs, either. Storage space on devices like the iPhone or iPod Touch will be constrained for a while as we wait for the flash memory industry to continue packing more bits of storage into every chip. If you've got a ubiquitous, fast broadband connection--such as 3G and its eventual successors--cloud storage makes more and more sense. People always want more storage, and one way to satisfy those needs--and encourage more downloads from the iTunes Store--would be to ensure that potential customers will have enough storage for all their music and video with a free storage service that is also accessible from your Mac.

But the art of business--even in a Web 2.0-gone-mad world--has not yet evolved to the point where giving your product away for free always makes sense. Maintaining a storage and networking facility costs real money. And why give something away for free when people are willing to pay something--if not $99 a year--for a service?

Apple could turn .Mac into a real selling point for its hardware if it cut the price in half to $49--about what it would cost to maintain a pro Flickr account and 10GBs of file storage with Google--and improved the capabilities.

For example, if $49 a year granted you access to 20GBs of online storage, unlimited photo sharing on a Web page you designed, and unique capabilities such as Back to My Mac, you might be more willing to pay the equivalent of four bucks a month. Use the same service to link iPhones and iPod Touches with Macs, and you increase the value of each device, while also giving users a reason to buy both their handheld and desk-bound computers from Apple.

Or, Apple could give away a free year of .Mac service with the purchase of a new Mac. That's the drug-dealer strategy: the first one is free. After that, once you've put all your images and videos on the .Mac service, $49 a year won't seem like much to keep that service running. Apple does provide a 60-day trial period for .Mac services, but that's not enough to get hooked.

Apple has always tried to sell its products as models of integrated design, where the software is designed to work with specific hardware to promote reliability and stability. It has extended that philosophy to the third leg of the modern computing experience--the Internet--but it continues to deter people from using .Mac with a high price tag.

Grocery stores sell basic items like tuna fish and bread at razor-thin margins, because they know people are likely to pick up a few other things while they're at the market for the basics. Apple has an opportunity to do the same thing with .Mac, and it won't have to give away the store to make it happen.