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Apple's newest biz strategy: Free, free, free

In San Francisco on Tuesday, the company revealed a novel strategy -- giving away its flagship software. It may be the most natural move Apple could have made.

Apple software engineer chief Craig Federighi announcing updates to the Mac, including a free upgrade to OS X Mavericks.
James Martin / CNET
Apple revealed lots of new things on Tuesday during its product event at the Yerba Buena Center in San Francisco, but the most intriguing among them was not on the product list -- its newest business strategy: aggressive pricing.

"Today we're revolutionizing pricing," said Apple's senior vice president of software engineering Craig Federighi, right before announcing that the company would be giving away OS X Mavericks, Apple's new flagship Mac operating system. On the screen behind him, the word "Free" appeared from behind a glimmer of light, one of the hokey slide animations that Apple has used in its keynote slides since Steve Jobs was the ringmaster.

On a day where Apple announced a slimmer, faster, renamed iPad Air, and an iPad Mini with Retina Display, the biggest story may have been in dollars and cents, with the company electing to give away some of its marquee software offerings.

Aside from Mavericks, Apple also announced that its iLife and iWorks suites -- with revamped versions of key apps like Garage Band and Pages -- would also be free with new iOS or Mac purchases. It's not an insignificant sum for consumers. iWork apps like Pages and Keynote currently cost $20 a pop in Apple's app store.

The move comes in the face of more intense competition for Apple on the software front. Google's suite of productivity apps, which includes Drive for storage and file syncing, and Docs for word processing and collaborative working, has increasingly established itself with users. And as Apple's biggest mobile hardware competitor, Samsung, gains market share, Android users are that much more tempted to use Google's productivity suite.

Now Apple has added collaborative editing features to Pages and new sharing and syncing capabilities for iWork apps among different devices -- for example, start a project on the iPad and pick it up on a Mac.

The strategy can also be seen as a play against Microsoft, the venerable leader in the productivity software category. Apple even took a dig at Redmond in its presentation, noting on a slide that users spend $99 on Office 365 per year. Melissa Webster, an analyst at the research firm IDC, said that the race is so lopsided toward Microsoft that the firm doesn't even keep market share data on the category. So what to make of Apple's giving iWork away for free? "It's a nice, carnivorous strategy toward Microsoft," said Webster. "It makes new Mac users think twice about getting Microsoft Office."

Webster also mentions that it could be a pre-emptive strike against the market leader, and an attempt to lure users to Apple's own services, as Microsoft gets ready to release Office on the iPad. For its part, Microsoft has given its share of freebies. Last week, the company announced that it would give Office 365 ProPlus to students at academic institutions that license the software to faculty and staff.

Of course, productivity tools are one of Microsoft's plumpest cash cows, the biggest revenue stream for the company after Windows. So it's unlikely that Apple's software play will really disrupt Microsoft Office's mojo. But it can be a useful tactic for Apple to occupy its users while trying to disorient a competitor. "It helps to distract [Microsoft]," Webster continued. "It's like death by a thousand paper cuts."

Giving away software could also be one of the most natural moves for Apple. Chuck Jones, founder of Sand Hill Insights, a technology research firm, notes that most of the company's new Mac users probably already own iPhones and iPads, and updates for iOS -- Apple's mobile operating system -- have always been free. Following suit with the desktop OS might just be the right play into consumer behavior.

Not only does the strategy shift come when Apple's competitors are stocking up their war chests, but also at a time when Apple is sitting pretty, to the point of, its critics say, coasting. While the company gets a lot of flak these days charging that it's lost the ability to innovate, it's still got fat margins and lots of users. "They've got so many people in the ecosystem now. Now is the time to make sure they stay," said Jones.