Why Apple Is Gunning for Microsoft

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Apple announced a few new products yesterday, including a new thin and light iPad Air model.

But mostly, the event was an assault on its old rival Microsoft.

Always disciplined in messaging, the message from Apple was loud and clear: Microsoft has no vision and their software is wildly overpriced.

Apple CEO Tim Cook had this to say about Microsoft at the announcement: “The 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 will do next?”

Apple engineering VP Craig Federighi said: “The days of spending hundreds of dollars to get the most from your computer are gone.”

And Senior Apple VP Eddy Cue said “Others would have you spend as small fortune every year just to get their apps,” referring to Microsoft Office 365, which was displayed on the screen behind him.

To emphasize their point of pricing, Apple appeared to cut prices to the products that compete against Microsoft cash-cow Windows and Office products to zero.

Apple announced yesterday that the new version of OS X, code-named Mavericks, would be free.

In practical terms, it’s not much of a price drop. OS X, Mountain Lion cost only $19.99. Still, even that is far less than what Microsoft charges for Windows 8, which starts at $119.99 and goes up to $199.99.

Microsoft charges as much as they do because, well, that’s what they do for a living. They sell software, mostly. The Windows division earned more than $19 billion last year. Giving away Windows free is not an option.

The disparity between OS X’s new price of free and Windows’ price of $119.99 is an illusion, actually. OS X isn’t actually free, and Windows usually costs far less.

Apple’s new pricing policy is about making less money and lowering revenue by the amount they used to make with OS purchases. The cost of OS X will be recouped by system and content sales.

Mavericks is free in the same way a 16 GB subsidized iPhone 5S costs $199 instead of $649. A “subsidized” phone isn’t actually subsidized at all. Quite the opposite. The apparent price has been reduced, but then the consumer pays for it in their monthly wireless bill. Even after it’s paid off, the customer keeps paying for it. So the average “subsidized” iPhone costs far more than an unlocked iPhone.

Likewise, about 65% of the revenue from the Windows division at Microsoft comes from sales of Windows – not to users but to PC and laptop makers, which pay a bulk rate for Windows far less than the retail consumer price.

When a user buys a new PC or laptop, they get Windows “free” in the same way a new iMac or MacBook user gets OS X “free.”

So OS X really costs more than free. And Windows usually costs less than $119.99. But the perception Apple’s new pricing policy creates strongly favors Apple in the minds of consumers.

Microsoft’s complex and confusing pricing structure also works against Microsoft. While even when OS X cost money, it was one simple price for everybody. Windows, on the other hand, costs different prices for different versions when you buy from the Microsoft Store. And it costs different prices on other sides, where online retailers are trying to compete on price against each other.

As a result, the purchase of Windows is often a negative experience as consumers experience the “paradox of choice,” as psychologist Barry Schwartz calls it, followed by buyer’s remorse.

The “paradox of choice” is a feeling of unhappiness caused by not being sure which version to get — save money on the basic version with fewer features or spend more and get Windows 8.1 Pro? Add Windows Media Center for an additional $99.99?

Buyer’s remorse is that lingering feeling after purchase that one got the wrong version.

Even when past versions of OS X cost actual money, it was a good feeling for consumers. One version meant no choice paralysis and no buyer’s remorse. But now that it appears to be free, upgraders will feel great after downloading it, whereas Windows upgraders and buyers will continue to feel bad after paying for Windows.

Apple also recently made both iLife and iWork productivity suites free. (Note that these are free only for upgraders and new device buyers.)

Office 365 now costs a $99 per year subscription fee, which means that, say, over a decade Microsoft customers will pay a whopping $1,000 for productivity suites competitors are charging nothing for. And although Microsoft’s Office is far more “feature rich” for some professionals, Apple’s alternatives are far simpler and easier to use for the majority of people.

Why Microsoft is Now Enemy #1

I believe there are two reasons why Apple is suddenly gunning for Microsoft.

The first is that Microsoft is currently in disarray. Microsoft CEO Steve Ballmer, who has held that position since 2000 and worked at Microsoft since 1980, announced in August that he would leave the company within a year.

So the CEO of Microsoft is what they call in politics a “lame duck” leader — someone whose authority is weakened by the knowledge that he won’t be around much longer. Ballmer’s ability to rally and unite Microsoft’s waring divisions has been seriously compromised.

Just as in boxing, where you really go after your opponent when he’s winded or injured, Apple is seizing the opportunity to kick Microsoft while it’s down for maximum effect.

And second, with the decision to directly sell Surface tablets and the more recent decision to acquire Nokia, Microsoft has for the first time ever actually entered Apple’s business directly.

Apple and Microsoft used to be “frenemies” engaged in “coopetition,” both competing and partnering, and each company offering software on the others’ platforms (in Apple’s case iTunes and Safari).

Microsoft used to be a software company selling software to OEM partners and consumers, who actually bought their hardware from other companies. But the old PC business is in steep decline, thanks especially to consumer embrace of tablets like the Apple iPad. Microsoft’s response to this is to augment the old Microsoft model with a new Apple model of selling integrated hardware, software, services and content.

While Google appears to be the major competitor, in fact Microsoft is now a more direct competitor.

For example, Google’s massive market share leadership in smartphone operating system mostly doesn’t benefit Google or take sales away from Apple. The majority of Android deployments are for third-world, no-name, zero-margin devices that don’t come with access to Google’s Play store. These users aren’t “customers” of either Google or Apple, and really aren’t relevant users in Apple’s mind.

But buyers of Surface tablets or Nokia phones are, in fact, the exact same customers Apple is going after. Every sale of a Microsoft device is a lost sale for Apple — and a lost opportunity for future software, service and content sales.

And that’s why Apple is now gunning for Microsoft.