Why Apple's Mac software isn't really free

Analysts call it a marketing coup that will broaden the reach of the company's ecosystem and allow it to charge premium prices for upcoming gadgets.

By MSN Money Partner Oct 23, 2013 1:20PM
Apple’s Craig Federighi speaks during an Apple announcement on October 22, 2013. copyright Justin Sullivan/Getty ImagesMarketWatch on MSN MoneyBy Quentin Fottrell

The most surprising announcement at Apple's (AAPL) event Tuesday wasn't the new and thinner iPad or the revved up MacBooks, but rather the company's decision to give away the software that runs its computers. The Mac OS X operating system, for which in the past Apple has charged as much as $169, is now free.

But not exactly, tech analysts say. Even though Microsoft (MSFT) and other companies will now be under pressure to follow suit, all this free software will probably come at a price -- meaning that it will be baked into the cost of hardware and other services going forward. (Microsoft owns and publishes MSN Money.)

"Today, we're going to revolutionize pricing," Craig Federighi, who heads up Apple's operating systems, said of the new OS. Mavericks, as the software has been dubbed, will be faster and use up only the amount of battery the task requires, but –critically -- it will keep computer users within Apple's ecosystem.

"It looks like Apple is trying to reinvent the economics of the entire industry," says technology analyst Jeff Kagan. "On the one hand, it's unsettling for its competitors. On the other hand, what the heck took them so long?"

It's a change of strategy for Apple, although it's not the first time the company has given away its operating system. The Mac OS was free from 1984 to 1991, and Apple first charged $95 for the 7.1 version in 1992.

But tech pros say the timing is critical. "It's a reverse of the Microsoft ecosystem, where Office is the cash cow and the margins on hardware are slim to none in some cases," says Mark Spoonauer, editor in chief at LaptopMag.com. "Amazon (AMZN) has come up in price a bit, but makes its money on content and Amazon Prime subscriptions, so it's also the reverse of Apple."

With Apple's announcement, this ecosystem has officially become more important than the operating system, says e-commerce consultant Bryan Eisenberg. Computer and smartphone companies are locked in a gold rush to supply consumers with their technology so they become a one-stop shop for everything from movies and music to books and garden furniture.

"Apple has basically established that there is more value than just an operating system," Eisenberg says. "It makes boatloads of money from the whole ecosystem. Give people a great experience and they will pay for extras."

Other companies already offer their software on a subscription model rather than licensing their products, says Offir Gutelzon, founder and CEO of Keepy, a digital file-sharing site. Adobe's (ADBE) Creative Cloud offers a range of software for $50 a month on a yearly contract, or $70 month-to-month. (Some popular apps like Photoshop and Premiere Pro can still be licensed for $19.99 per month on a one-year contract.) Similarly, Google (GOOG) Cloud offers the word processing software Google Docs and photo-sharing site Google Picasa for free. But, like Apple, it also charges for storage. "Over time, people will pay and pay and pay," Gutelzon says.

Though users can cheer the free operating system now, the move also gives Apple more leeway to charge premium prices for its upcoming gadgets. The iPad Air, launched Tuesday, costs between $499 and $929, depending on the model. "Apple has taken the strategy of giving its software away for free in order to improve the customer's user experience and spur the purchase of premium hardware," says Brian Colello, analyst at research firm Morningstar.

But charging those prices is still a gamble, free operating system or not. "It's a clear contrast to Amazon, which appears to be selling its tablets at close to cost, in order to drive media and content purchases," he says.

Apple's free operating system is essentially a marketing coup, Spoonauer says. Having cut the OS prices in recent years to $29 for OS X 10.6 Snow Leopard and to $19 for the OS X 10.8 Mountain Lion last year, he says zero was the next natural move. "You're paying a premium for Apple's hardware, so it makes sense for the company to try to sweeten the deal."

More from MarketWatch:
Oct 23, 2013 1:42PM
For most PC Gamers there is only one Choice, WIndows 7. Apple OS comes no where close to supporting the range of PC games and other software that Windows can. Anyone with the knowledge to build their own PC can build a far better desktop with less money (especially with an AMD CPU and ATI GPU) then buying an Apple. Most people who purchase Apple desktops however do so because they have no desire to ever modify or upgrade their computer in the future. 
Oct 23, 2013 3:56PM
Apple feels there is a sucker born every second and they are right. The people that buy Apple would buy dog crap too if Apple marketed right.
Oct 23, 2013 5:10PM
this article should report the real facts. this is not a "free operating system" this is a free upgrade if you have os 10.6 or above.
It's not like Linux where you can download and install on your own hardware for free.  you have already bought the mac computer, but instead of charging you to UPGRADE your computer to the new OS they are allowing you to install the new OS for free. 
It really blows my mind that i had to google search and get the real facts on this "free download".

who is thumbs downing my post? thumbs down for giving the whole truth on an article that didn't give half the details of the "free download"  must be mac fanboys.
Oct 23, 2013 4:06PM
Apple's motto: A fool and his money is soon parted. Yes, these fools do pay. ;)
Oct 23, 2013 4:18PM
Oct 23, 2013 5:00PM
I still don't understand why people pay for an OS.  Linux has been developing open source software for decades. It's free.  Ubuntu 12.04 still has long term support for at least 4 more years. If you want to take a look.
Oct 23, 2013 3:49PM
Apple is just trying to reduce its loss of market share to Linux distributions which are free....
Oct 23, 2013 5:27PM
Apple, always a gimmick operation.  If they don't lie, they deceive. 
Oct 23, 2013 5:03PM
Ubuntu!  Burp.....pass me another one please!
Oct 23, 2013 4:52PM

duh!!! ofcourse.... Do you think restaurant next door do not charge you for water, silverware!??comeon

Oct 23, 2013 3:51PM
Oct 23, 2013 3:06PM
If you ever buy a Mac you won't go back. I use a HP laptop at our vacation home during the summer and just cannot stand it error's everything. Going to buy  a Mac for next summer just the efficiency along will save me in the stock market where I need to move fast and don't have to worry about Blah, Blah not responding
Oct 23, 2013 2:34PM
was absolutely fed up with the windows software since xp, tired of crashes, tired of obsolete computers after 2 years, tired of viruses ruining performance and hard drives. was "locked in" like most windows users feel. went apple with a 2007 iMac . has never crashed. never blue screened. never got a virus. installed mavericks this morning and my computer is flying, better than new. will never, ever go back to windows. run xp pro on my office computers b/c software incompatibilities , will go to cloud computing next so i can dump all windows based products.
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