The Devaluation of Software

Takeaways from the Oct 2013 Apple Event


There was a lot of attention paid to Apple's release of two new iPad models yesterday. While I think both the iPad Air and iPad Mini with Retina Display look like great tablets I think the much more important announcement had nothing to do with hardware and everything to do with price.

Just Giving It Away

Apple's first big price announcement was that Mac users would be able to upgrade to the new version of OS X, Mavericks, for free. After several years of lowering the upgrade price for new OS versions, from $120 down to $20, Apple has now made the move to simply give their OS away for free.

Apple can do this because they sell every device that can run OS X. Because they are 'vertically integrated', meaning they make the hardware, software, and services for their devices, they can choose to make their profit in hardware and give the software away for free as a value add to their customers.

The obvious comparison to draw is with Microsoft, who built one of the world's most successful companies by selling their Operating System, Windows, to PC Manufactures and consumers for hundreds of dollars per copy. While Microsoft is beginning to offer some small OS upgrades for free they are still selling new versions of Windows 8 for $120 retail, and brining in more than 5 billion dollars a quarter from Windows OS sales.

Microsoft doesn't only make money from selling operating systems of course, they make even more money selling their productivity suite, Microsoft Office. Unfortunately for the guys up in Redmond Apple also announce that their iLife and iWork product suites would be free with the purchase of any new Mac or iOS device. Once again, Apple is using the profits generated in hardware sales to subsidize the cost incurred in building some of the most advanced productivity and lifestyle software available in the marketplace. It's easy to see how people at Microsoft might be sweating bullets today.

Stop grinning

If you develop software, any kind of software, and are grinning at the position Microsoft finds itself in as the market begins to believe that Operating Systems and Productivity software should be free, you should stop. This isn't a problem only for Microsoft, it's an industry wide problem that is accelerating at an incredible pace. Software prices, all software prices, are falling to zero. The introduction of Mobile Apps and the rush to the bottom in pricing has begun to train consumers that software should be free. First it was games, then it was nearly any app on a tablet or smartphone, now it's operating systems and productivity suites. There is no part of the software industry that will be untouched by this devaluation over the coming years.

This didn't start with yesterday's announcement, it's been happening over the last few years in the mobile marketplace and has had very interesting consequences for the types of software that can actually turn a profit. What is interesting about Apple's announcements yesterday is that now, one of the biggest software companies in the world is giving away their software. Apple is paying a small army of software developers to create outstanding software and then just give it away. If you're a small developer trying to make a living off the software you create, there is no way to compete with that. You can't charge less than $0 and you are highly unlikely to make something that is so much better than Apple's products that you can convince consumers to pay you for it.

This is exactly the kind of Software Devaluation that Satoru Iwata, the CEO of Nintendo, has been warning us about for the last several years.

"We make platforms designed to demonstrate the high value of high quality videogame software. But, there is a second, entirely different way to consider the value of software. The objective of smartphones and social networks, and the reason they were created, are not at all like ours. "These platforms have no motivation to maintain the high value of videogame software - for them, content is something created by someone else. Their goal is just to gather as much software as possible, because quantity is what makes the money flow - the value of videogame software does not matter to them."

The difference is that now it's not only game software, it's all software. Maybe more of us should have listened to him.

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