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Apple Embraces Free: 5 Reasons Why

Apple challenges Google and Microsoft with free software.
Better still, through the iTunes App Store and the Mac App Store, Apple managed to decouple software from devices by linking apps to Apple IDs. A few years ago, Apple urged Windows users to switch to the Mac. And back then, you really did have to switch, abandoning your PC to start afresh with a new Mac. Things are different now. You may be able to get rid of your Mac, but you remain an Apple customer through your Apple ID. All your software remains, waiting for you. The cloud runs on the "Hotel California" business model: You can check out any time you like. But you can never leave.

Apple, of course, is a hardware company, too. But hardware is a hard way to make recurring revenue. Device owners may keep using their gear for years without paying again. And there's no guarantee that consumers will continue to replace their phones or tablets as frequently as they have been. Subscriptions, advertising and collected data promise predictable revenue to complement Apple's cut of app sales. Being a forward-looking company, Apple is focusing on the cloud as the way to connect its customers to the tech industry's next big thing: wearable devices.

4. Apple Isn't Giving Up On Ads

Competing against Google means being in the ad business. Apple is in the advertising business, but hasn't been doing particularly well. Part of the problem was that when iAds launched in 2010, then-CEO Steve Jobs wanted iAds to carry ads as well-crafted as Apple's products. Apple sought large advertisers that could commit large sums to fulfill its minimum buy-in. The strategy didn't work and iAds has frequently been described as a failure.

Of course, Silicon Valley loves to characterize failure as a stepping stone to success, mainly because it's a great way to convince investors to keep their wallets and purses open. But for Apple, with more cash than it knows what to do with, there's also some truth to the saying. The company took another stab at advertising in June with the launch of iAds Workbench. The price of admission for this new form of iAds is $50 instead of $500,000. If Apple can figure out how to offer advertising for free, then Google will really need to worry.

5. Apple Smells Blood

As strong as Google may be at the moment, Microsoft is weak. It's looking for a new CEO who can do what Steve Ballmer could not. About the best thing that can be said of its mobile effort is that it's doing better than BlackBerry and Nokia. Gorged on profits from Windows and Office, Microsoft became complacent and is now scrambling to remake itself in the image of Apple, the company it once saved with a $150 million investment and a promise to keep making Office for the Mac.

Rather than returning the favor, Apple senior VP of software engineering Craig Federighi on Tuesday declared, "The days of spending hundreds of dollars to get the most out of your computer are gone." On the projection screen behind him, the image of Microsoft Windows 8 Pro, priced at $199, shattered into pieces.

Microsoft's business customers won't abandon Windows and Office overnight. But with Office still not available on Apple's iPad, more and more business customers sold on the iPad will settle for Apple's iWork apps, Pages, Numbers and Keynote, and perhaps even come to prefer it. The price, after all, is right. And these are customers Google covets -- business professionals accustomed to paying for technology.

Apple may be sold on free, but rest assured, someone's going to pay.