Apple (AAPL) met most analysts' expectations during its keynote event on Tuesday, by introducing a new, lighter iPad, a retina display iPad mini, and providing updates about its new personal computers and Mavericks operating system.
The main surprise from the meeting was an unexpected approach to the pricing of the company's software offerings, as the Cupertino giant decided to include most of its own apps free of charge with any new hardware sale, and drop charges for major software updates.
In marketing terms, the move is very well resumed by Ben Bajarain, industry analyst at Creative Strategies, in his tweet sentence:
Challenging the Microsoft model: the consumer is the real winner
With this move Apple directly attacks two of Microsoft's (MSFT) largest businesses: its Office software suite of products, and its operating system upgrade charges.
Apple's productivity apps - Pages, Numbers and Keynote - had already been made available free of charge with the purchase of any new iOS device last September. The apps are now receiving a massive visual update to match iOS 7 design's guidelines, and are enriched by the addition of new collaborative editing features and iCloud syncing capability. According to Apple, iWork has been completely re-engineered in 64-bits. The end result is a suite of services that can be considered as a potential competitor to both Microsoft's Office and Google's (GOOG) Google Drive Apps.
VentureBeat has a nice article resuming Apple's "assault on Microsoft" through three main quotes taken from the keynote (emphasis added):
"Our competition is different: They're confused. They chased after netbooks. Now they're trying to make PCs into tablets and tablets into PCs. Who knows what they'll do next? I can't answer that question, but I can tell you that we're focused."
"The days of spending hundreds of dollars to get the most from your computer are gone."
"Now you can create a document on an iPad, edit it on a Mac, and even share it with a friend who's stuck on a PC."
The last quote seems to suggest a strategy similar to what happened when iTunes was made available on PCs: let's show consumers what we can do, and wait for them to realize how better it would be to move to our platform.
The Butterfly that Started the Apple Tsunami
10 years ago today, Apple did something extraordinary, but it didn't seem like it at the time.
On October 16th, 2003, Apple launched "the best Windows program ever" - iTunes for Windows.
That opened up the iPod to the 97% of people who had PCs.
They could see how well the software worked with the hardware.
They learned how easy it was to upgrade.
Their first iPods turned into their first iPhones.
Then they realized that their lives would be a lot easier if they switched to a Macintosh all together.
Another key take from Apple's meeting is that the company remains fully committed to its Mac computing offering. The Mac represents about 45% of all industry's profits - with only about 5% of units shipped.
Apple, however, is learning many lessons from its mobility vertical that are being implemented into its personal computers, including the importance for the whole ecosystem of having all customers transferred to the latest OS as quickly as possible, as opposed to Microsoft's strategy of trying to profit from the move, even if it means leaving many end users with an inferior customer experience.
A picture from Apple's keynote, showing a road sign symbolizing Microsoft's confused approach in a new post-PC era.
The consumer mobile OS has come to dominate our lives - Microsoft's conundrum
Google's Android operating system has become the de-facto dominant OS as far as mobile phones, at least worldwide. Google's business model, however, doesn't put any emphasis on profiting from hardware or software sales, as it gets its benefit from "selling consumer data" to advertisers.
Apple is willing to give its software as a "gift" to lock consumers into its products/ecosystem.
Microsoft remains the only company still selling its consumer operating systems, although the Redmond company is trying to move in an Apple like direction - especially in mobility, through the recent Nokia Device and Services acquisition.
Its attempts as a hardware and software integrated company haven't really been successful, as the Surface has so far failed to achieve any traction. A few months ago, the company had to take a $900 million charge due to Surface RT inventory adjustments.
Nokia has unveiled its Lumia 2520 tablet, a Windows RT powered device set to go head-to-head with Microsoft's Surface 2, which went on sale earlier this week.
It's not entirely clear that what the world needs is another Windows RT tablet, as the response to the operating system so far has been rather muted.
Microsoft is keen to push Windows RT because the operating system gives the company (in theory at least) a much-needed way to compete on price against the iPad and even cheaper Android tablets, without cannibalizing Windows 8 sales too much. However, the confusing branding of Windows RT, the strange desktop-plus-tiles interface and a lack of killer apps has seen Windows RT-powered devices struggling in the market.
In a presentation outlining their rationale for the transaction, Microsoft stated annual Lumia sales needed to cross 50 million units to reach operating profitability. The problem is that this calculation assumes flat operating expenses. The contribution margin on Nokia's Smart Devices unit has been stubbornly negative, with gains coming exclusively from cost cuts.
So far, Microsoft has held Office back from Apple's iOS platform in an attempt to drive sales to its own tablet offering. The company indicated that this will likely happen in the future, but there is no certainty as to when or at what price point this might happen. Microsoft sells an annual subscription to Office 365 on other devices for about $100 a year.
More interestingly, Apple would get a cut on every sale Microsoft will generate through Apple's App store, so reducing its margins.
Apple's keynote move may have put Microsoft under additional pressure, as the window of opportunity to bring Office to the iPad successfully may have now become smaller.
Microsoft needs a new CEO, as quickly as possible - and hopefully a visionary
For a laser focused company like Apple it is relatively easy to highlight competitors' weaknesses and try to turn them into an advantage for its own product offering.
Microsoft's move to a different business model (devices and services company), Nokia's integration and the contradictions between existing business lines (extend Office to the iPad or use it as a tool to strengthen the hardware offering?) are all happening as the Redmond company faces a leadership change.
Most analysts agree that the new Microsoft CEO needs to be a great capital allocator - especially at a time when the company can still count on several billions of free cash flow per year generated by its declining, semi-monopolistic PC-related line of business.
If we may add our two cents, we would go for a quick decision, and choose an outsider like Ford's (F) CEO, Alan Mulally. Having witnessed his forward thinking at the helm of Ford during the toughest automotive crisis ever, we believe he might be the kind of leader that can give a direction to what we see as a ship with several leaks, and no clear direction to a safe port.
Investment wise, we see Microsoft as a position to avoid right now, as moves like Apple's "free software" offering highlight the contradictions of a company that needs to reinvent itself before customers move to a different platform, on what can be seen most likely as a no return road.