Apple October 2013 event (Craig Federighi, free software)

One of the easily overlooked aspects of last week’s iPad keynote is how Apple revolutionized software pricing. “The days of spending hundreds of dollars to get most out of your computer are gone,” charismatic software chief Craig Federighi enthusiastically remarked just before revealing that OS X Mavericks will be a free upgrade to everyone.

The move has ushered in “a new era of Mac,” he said. And of course on the iOS side, the iLife and iWork suite of apps for content creation and productivity has gone from paid to free for every new iOS device owner.

The best part: future updates to iWork/iLife apps and upcoming new versions of the Mac operating system are going to continue to be completely free. What sort of dark magic is that?

Alright it’s not magic, it’s actually some deferred accounting and just sound marketing.

“We are turning the industry on its ear”, CEO Tim Cook told investors on a conference call. “Some other folks charge $199 for each of these, the operating system and the productivity apps. We wanted to make it a part of the experience.”

And finance chief Peter Oppenheimer made it clear that Apple’s fans will never going to have to buy OS X upgrades again because future OS X releases will be free, no strings attached.

“We are now making iPhoto, iMovie, Pages, Numbers, and Keynote available as free downloads to customers who purchased new iOS devices”, he acknowledged. “We are also making Mavericks and future updates free to our Mac customers.”

Apple October 2013 event (Tim Cook, iLife free 001)

In doing so, Apple is adjusting its accounting because the company will be still spending money on software development without getting anything in return. So who’s going to fund R&D work and pay for the programers who write these apps?

Investors!

“As a result of these additional rights and features, we are deferring a greater portion of sales of each iOS device, Oppenheimer announced on the call.

Apple is actually required to defer some revenues from hardware sales to account for the decision to offer software updates for free. An unintended consequence: an additional $900 million in deferred net revenue in the December quarter.

So what’s all this deferral business? Think of it in terms of, say, magazine subscriptions where a publisher collects the money upfront for the year, but can’t recognize it immediately until it actually delivers the magazine at your doorstep.

iBooks for OS X Mavericks (Multiple books)

Likewise, Apple must gradually recognize revenue from hardware over time because the good (an iOS device, for example) is not entirely part of the price paid as new features will get added by way of free software and OS updates after the sale.

Therefore, Apple can’t book revenue for those products until they are fully delivered. A side-effect of deferred accounting is that Apple’s December quarter alone will “hide” nearly $1 billion as this sum gets set aside for later recognition.

Why $1 billion (or $900 million, to be more precise)?

Because Oppenheimer said Apple would defer between $15 and $25 per iPhone or iPad sold (a $5 increase) and between $25 to $40 per Mac sold (a $20 increase). Multiply those numbers with Apple’s expected December quarter sales and you’ll get the $900 million in deferred revenue over a two-year period.

Got that? No? Doesn’t matter.

Eagle-eyed readers will remember the company similarly switched to this accrual accounting method when it stopped charging iPod touch users for iOS updates.

Companies are bound by law to go deferral by U.S. laws whenever features are added to the products that’ve already shipped. Unhappy investors should talk to their senator about killing such obscure account regulations.

  • Looks like Microsoft is the only one left charging for their OS.
    OSX – Free
    iOS – Free
    Android – Free
    Ubuntu – Free

    • chumawumba

      Microsoft just doesn’t get it.

      • Quang

        Microsoft has the monopoly power in Office, Windows. So they will never make them free, just to boost hardware sales.

        Also, Microsoft is technically a software company. If they give Office and Windows for free, where can they get profit from?

        The Windows Phone OS is free because Microsoft doesnt have any power in mobile platform.

      • Hwang Lee

        Agreed, however, Microsoft should really start watching out for Google Drive. While it may not be as smooth or in-depth as Office, the sharing capability on is excellent.

    • @sexyhamthing

      well.. they are primarily a software company….. Hey lets trash our primary source of income and subsequently lay off hundreds of employees -_-

    • Pitchy

      How is iOS free? Can I download a copy of iOS and install it on any device I would like? iOS comes with your iDevice and you receive a limited amount of updates for free. Eventually older devices get left behind and if you want the new version of iOS, then you need to purchase a new iDevice.

      If Microsoft was in the business of selling hardware more than software and selling their hardware at more of a premium price, then they could go with the free model.

      I would have been disappointed if I had to have paid for the Mavericks update.

  • Tobias9413

    Anyone know if I can get iWork for free? I have a MacBook Pro 13 inch that I got maybe two or three years ago. It was originally running lion. I upgraded to the mavericks ios but iWork isn’t free?

    • Prasoon Singh

      They made a blog about this. Just find a trial for iWork ’09 somewhere and then you get the updates on the Mac App Store.

    • Eno K

      According to the article its free for new iMacs or Macbook Pros. Try what Parsoon said. It may work.

    • Quang

      Download iWork ’09 from anywhere you want.
      Install it.
      Go to Software Update, and click Update button, login, then you have it for free.
      Apple said they intended to do that. Its not a bug. Its not illegal.

      • Anthony Antunez

        Actually “downloading iWork ’09 from anywhere you want.” is illegal. You were either supposed to have a paid installation of iWork ’09 from the original CD or the Mac App Store and update to the new versions for free or you have to buy the new iWork from the Mac App Store. Same for iLife. Getting it completely free is only for people that buy a new Mac. Apple didn’t say “they intended to to that.” they said they believe their customers are honest and will not go after people who got iWork or iLife illegally because they aren’t worried about it hurting their sales. That being said, I totally did what you said anyways XD

      • Quang

        Actually, I updated it for free before this news is published. I watched the keynote, and downloaded the trial after that because I wanted to see if its worth to buy it. One morning, Apple alert about the update in Mac Appstore (badge in the Update tab), and ask me to update it. As a normal person, I will just click Update All, as Apple tell me to do so. Also, there is no warning when I click Update. just ask me to sign in (just like I update other apps).
        Is it illegal to use the Trial version?
        Apple can easily block the trial from updating, or ask me to pay money (just like jailbroken iOS device with cracked apps on it. You cannot update), but they dont do so. That means they voluntarily give you the update for free.
        They didnt say they intend, but they did intend to do so.

        But anyway, thanks Apple for that 🙂

      • Anthony Antunez

        Oh! Yeah that was the trial bug. Apple has removed the iWork trial so you can’t do this anymore.

    • Eno K

      check comments below

      • Eno K

        I posted a link to an article on how to do it..but for some reason IDB removed it…not sure why

  • Vidhu Singhal

    Pardon my ignorance but I don’t fully get that “On purchase of any new Mac or iOS device”.
    Does getting new iOS device makes you get Mac apps free too? And vice versa?

    • Eno K

      So if you buy a new iPhone, iPod or iPad you would get the apps for free for iOS. If you buy a new iMac or Macbook Pro you would get the OSX apps for free.

    • Jimothy

      It’s meant to be “free for their respective devices.”

  • NoahMaranesi

    Just wondering if someone has purchased a new iPhone and they are able to get iWork for free on iOS. Could they enter your Apple ID into their phone and download it on your phone, then go back to your older iPhone and download. Will it be free?

    • Σαλαη αββας

      Yes you CAN get it for free

      • NoahMaranesi

        So if I buy the new iPad Air and purchase on there, I will be able to download for free on my iPod? Thanks.

      • Σαλαη αββας

        That’s for sure

      • Chindavon

        yes.

      • dpacemaker

        Wish they would include the Mac versions as well.

  • Pitchy

    Purchasing a Windows desktop/workstation and a copy of Office is still far less than the cost of a Mac.

    • dpacemaker

      Yeah but overtime you will have more headaches with constant updates and virus scanning. On the other side you would have a better communicating ecosystem and a far smoother system for a longer period of time. When it comes to gaming though a Mac can’t compete with a custom built MS system.

  • bearmon2010

    I hate Microsoft’s software like this because they are greedy!