Now that Apple has announced that OS X updates will be free going forward, and many of its first party apps like iWork are going to be free with new devices, Microsoft seems to have its task cut out. Many people seem to think that this move by Apple will really hurt Microsoft. In some ways Apple is trying to commoditize software the way Microsoft commoditized hardware over the last 2 decades. However, there are a few key points that not many have mentioned:
- Microsoft has given away major OS updates for free. E.g. Windows XP SP2. In a way, the Apple move was preempted by the free Windows 8.1 update.
- Microsoft is a past master of bundling free software with its OS. Remember Internet Explorer vs Netscape? Or more recently, Office being given away with Windows RT.
- Apple hardware remains luxury items, and free OS upgrades are not going to make budget conscious people switch from Windows to Apple devices. That said, the real threat comes when people realize that a tablet meets their requirements and is probably cheaper than a PC (desktop\laptop) when it is time to get a new device.
- The real threat to Microsoft comes from Android, as OEMs are gradually warming up to Android as an alternative for Windows for laptops. Since the market is undergoing a major shift in the kind of personal devices being used (desktops to laptops to mobiles & tablets), there is a big scope for a free OS. Android has been successful on mobiles while Linux failed on PCs due to this very reason.
- OS development has an associated cost even if you do not pay a third party for it. Apple is just subsidizing the software costs through hardware margins. Even if OEMs decide to opt for Android or Chrome OS, they will need an in house team to customize the OS. Of course, OEMs probably already have an in house team developing software for Windows given the typical bloatware that comes pre-installed on PCs.
The bottom line is that Microsoft has to continue to woo its OEM partners who bring in the OS revenue, while at the same time transform its revenue source to hardware. The Nokia acquisition becomes even more important now.