Apple's Payoff on Leopard 'Family Pack' Upgrade

| About: Apple Inc. (AAPL)
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By Carl Howe

John Gruber at Daring Fireball has some great statistics about Apple (NASDAQ:AAPL) Leopard upgrade Family Packs, which allow customers to install Leopard on up to five machines in a household. He also has data about which versions of Leopard that his readers are ordering through his Web site:

The links for pre-ordering Leopard are doing well; as of last night, 579 orders have been placed by DF readers. One thing I find interesting is the breakdown between single-license copies and five-license “family packs”: 408 and 171, respectively.

What’s interesting about this is that the single-computer license isn’t enforced in code by the operating system. (Or at least that’s been the case with Mac OS X 10.0 through 10.4.) And, I suspect, most DF readers are aware of this. Which means many readers are doing the right thing simply because they’re honest. I have no idea if this breakdown is representative of the Mac user base as a whole, but if it’s even close, these family packs are a huge success for Apple.

So being a geeky numbers guy, I'm curious. These family packs are a huge success, but how huge? I'd like to know if we can actually make a business case that Apple Family pack strategy actually benefits Apple and its shareholders. So lets run some revenue numbers using John's breakdown.According to Apple's earnings call Monday night, there are 21 million Mac owners who can run Leopard. My assumptions are as follows:

  1. Leopard buyers has the same 30% family pack/70% single-user proportions John notes,

  2. About 66% of Macs that can run Leopard overall will upgrade to Leopard using a combination of single-user or family pack offers. If only an unprotected single-user version is available, we assume that number would rise to about 75% because roughly half of the upgraders who buy family packs would buy multiple single-user licenses instead. The rest, however, would simply make copies off the unprotected single-user disk to cover their multiple computer households.

  3. Apple receives an average price of $109 for a single-user version and $189 for a family pack (some buy retail, others buy at discounts)

After running the numbers through the ENIAC (actually Apple Numbers) here, I come out with the following results for the two scenarios:

By providing its customers the option of buying multiple licenses in a family pack, Apple reaps about $103 million more in revenue than if it went with a "We only sell single license units with no quantity discounts" strategy, despite the fact that would sell roughly two million more single-user upgrades if it didn't offer a family pack. Of course, this doesn't take into account the greater good will Apple gets from its customers from trusting them.

The bottom line: Not using copy protection (which tends to offend loyal customers while doing little to combat actual piracy) and providing reasonable upgrade options is not only good marketing; it's good business. Apple's Family Pack licensing strategy will increase its upgrade revenue about $103 million or 6% over the $1.8 billion Leopard upgrade cycle. And in the process, Apple will cement customer loyalty to boot. It's just one more proof point that treating customers with respect and trusting them to be honest pays.

Full disclosure: The author owns Apple stock. Model depends on assumptions and prices stated above and may not be indicative of your actual driving. Prices do not include taxes, title, or delivery. Your mileage may vary. Always wear your seat belt.