MBA students are taught to leave low margin high fixed-asset
business to increase ROA. Steve Jobs defied MBA teachings with unprecedented success.
Vertical integration of hardware, software and services is just one example. Tim
Cook looks to continue this trend of showing business school how business is done. Recent
Apple announcement will offer its operating systems and productivity suite for
free. Some view this as assault on both Microsoft and Google.
Giving out Apple operating systems and productivity suite for free does not necessarily mean increased adoption and high retention with positive economies of scope effects on other business lines, such as iCloud – which also has been underperforming since launch. Microsoft historically offered the operating system and productivity suites at much higher premiums than Apple with more success. Its Windows operating system and Office for Mac are multi-billion dollar businesses, unlike Apple’s. IBM in the past also decided to offer its productivity suit for free and it has not gone anywhere anyway. It will be interesting to see results of this move.
Apple is in need of a change. Their iPad business growth at
6% YoY well underperforming the market. Tablet competition is more brutal than
in phones where Apple has just two viable competitors to worry about. In
response to headwind Apple keeps or increases the price for the iPad and MacBook lines
giving up software for free. Asymco
estimates $½ billion of software revenues will be foregone. Other
analysts point out that software has been historically high margin business
for which Apple customers were happy to pay for. Also, an opposite move of
reducing MacBook and iPad prices by $100 and continue selling software and
updates would be a more welcomed move by Apple customers and would mean keeping
higher margin business.
Giving out Apple operating systems and productivity suite for free does not necessarily mean increased adoption and high retention with positive economies of scope effects on other business lines, such as iCloud – which also has been underperforming since launch. Microsoft historically offered the operating system and productivity suites at much higher premiums than Apple with more success. Its Windows operating system and Office for Mac are multi-billion dollar businesses, unlike Apple’s. IBM in the past also decided to offer its productivity suit for free and it has not gone anywhere anyway. It will be interesting to see results of this move.
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