Software prices went to 0

Last month, Apple announced that it would move many of its popular software packages to a new price tag: free. From operating system upgrades to productivity suite, the company slashed prices to $0, creating new challenges for Microsoft.

But why would they do such a thing? Was the goal to kill off Microsoft or was the company just joining a bandwagon that was already rolling?

Over the past few years, the consumer software world has been going through a software revolution, with new pricing models emerging over time. Prior to the 2000s, consumer software was either sold in a box (retail software), provided on a trial basis with the ability to pay later or pay for extra features (shareware), or completely free (freeware).

The advent of the internet allowed for new models to emerge: With software being distributed either as web applications or through models that required a connection to the internet, software gained the ability to be distributed on a subscription basis or subsidized through advertising. Over the past few years, application software has increasingly moved to an initial price point that edges closer to zero on a consistent basis. Witness recent changes:

  • Media organizers like iTunes are available for free, subsidized by revenue made from selling music, TV, and movies in their related stores
  • Media players like Pandora or Spotify are offered either for free, subsidized by advertising, or on a subscription-basis, which removes the ads.
  • Productivity suites (Word processing, spreadsheets, presentation software) are either available on a subscription basis (Google Apps, Office 365) or thrown in when buying a new computer (iWork)
  • Adobe offers its image manipulation software on a subscription basis while Apple offers its iLife suite free with purchase of hardware.
  • The rise of Free to Play as a leading category in the gaming world, putting pressure on pricing of game titles for computers.

Industry insiders point to the offerings on mobile devices having a large impact on consumer expectations regarding software. “The rise of online applications and apps for tablets and smartphones has given rise to an expectation on the part of consumers that software is free,” says industry analyst and Accurra Media Group CEO Jonathan Spira. “As major companies such as Google and then Microsoft have moved more in this direction, and given Apple’s very recent announcement that it will supply its productivity applications at no charge with new Macs and MacBooks, software companies have had to find other sources of revenue, including advertising, in order to be able to offer a quality product to their customers.”

With Apple’s iOS and Google’s Android operating system offered freely, it was only a question of time before all operating system offerings went to this model. Apple’s recent price drop on OSX is the continuation of a trend that started with Linux operating systems, became stronger with the rise of mobile devices.

For years, the price of Windows operating systems was hidden from consumers as it was bundled with the computer but with fewer people upgrading their hardware, the company’s pricing strategy on their Windows offering has become a weakness in their operating systems offerings. But their other monopoly, Microsoft Office, seemed relatively safe until the appearance of Google Apps, a suite of web-based tools that offered similar functionality. “Google Apps is the free sword of Damocles ready to behead the paid Microsoft Office hydra” says silicon valley insider Jonathan Hirshorn, who has worked with Apple and other companies for over 2 decades. “The future is not pay-once, it’s free with targeted paid upgrades on a regular basis,” he adds, pointing out that users are happy to pay a premium or upgrade price if they already derive some utility from the base free product.

But these new models also represent a new set of pressures on software manufacturers as the cost of software production may not be decreasing as quickly as the the upfront pricing of the software. Take, for example, video games. Today, the economics of the gaming industry go across the board between two extremes: AAA titles, with production costs often soaring north of $100 million and price tags in the $60-100 range, and free to play title, with more modest ambition and a revenue model that includes selling virtual goods or virtual currency to unlock higher levels. “Free to play gaming is like television while AAA titles are like movies” says gaming industry veteran Greg Costikyan, who currently works as the senior designer for Loot Drop. “There is room for both although it is notable that TV is much bigger than film (in terms of dollar gross), and I expect FTP will be much bigger than fixed-price games.”

Other people at large triple-AAA producers see the same thing happening, admitting off record that the era of DLC (downloadable content that is offered as expansion content on top of an existing package) will drive future growth for top-tier companies. “We may be seeing the end of titles being able to fetch $80 on their first day, and we will all need to adapt to that new model,” confided a senior executive in the gaming industry to me.

With tablets and mobile phones becoming the dominant form of computing, consumers have gotten used to lower pricing on software, where most apps are either free or cost under $5. Apple has witnessed that trend first hand and is now taking it the remaining platforms on which it offers software, as it can continue to derive revenue from the sale of hardware. Meanwhile, Google has long looked at advertising as its primary source of revenue so the idea of charging software is one that was never baked into its own DNA. But Microsoft will have to radically change its own DNA if it wants to succeed in this new world: the company practically invented the idea of charging for software and now finds itself in a world where its idea is no longer relevant.

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